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spk13: 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 on a listen-only mode. 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 1-1 on your telephone. You will then hear an automated message advising 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.
spk25: Thank you, Kevin. Good morning, and thank you for joining us today. 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 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 services industry. 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 to differ materially from those indicated by the forward-looking statement. 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 H-8K, which are available at the SEC's website, www.sec.gov. With that, I'd like to turn the call over to Raj.
spk19: Thank you, Susan. Good morning, everyone, and thank you for joining us for the earnings call. 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 roughly were, you know, if we could summarize them by, let's say, improve the balance sheet, do then improve the P&L, and improve the balance sheet means on the left side of the balance sheet, you know, rely less on resi and bonds and more CNI and CRE growth. On the right side of the balance sheet, rely more on core funding, defend DDA, and, you know, 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 at 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 the fourth quarter of 2023 was the continuation of that story. Deposits grew nicely, $426 million, despite the fact that includes a couple hundred million of brokered coming down. So excluding brokered, our deposits grew $604 million. NIDDA was down for a seasonal adjustment. It literally happened in the last two, three days of the quarter. Average DDA were actually down only $28 million, but period end were down more. And on wholesale funding, it came down as it did last quarter. FHLB brokered, everything was down. And on the left side of the balance sheet, just like last quarter, RESI loans came down $172 million. 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, I was seeing like it might be a flat quarter for CRE, but it also grew. So total between C&I and CRE, we grew $476 million. On credit, oh, by the way, you know, all of this led to margin expansion again. So margin expanded from 256 last quarter to 260. And if we keep doing this, margin will keep expanding. And we'll talk about it next year in a little bit. Let me just go through the rest of the fourth quarter first. NPAs, on the credit side, NPAs take down from 40 basis points to 37 basis points. And if you exclude SBA loans, then it's actually 25 basis points. So NPAs are getting to a place where they're so low that it'll be harder to drive them down. Charge-offs, nine basis points for the year. If you compare that to last year, I think we were at 22 basis points, if I remember right. So charge-offs for the full year have been You know, fantastic. 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. Yeah. 82 basis points. It was 80 basis points last quarter. Criticized assets did increase this quarter, as you would expect this time in the cycle. But overall, on credit, with charge-ups being where they are, NPAs being where they are, and our reserve, or ACL being where it is, I'm sleeping very well at night. Capital is robust. SEC 1 is now 11-4, and TCE to TA also is now at 7%. Unrealized losses in the securities portfolio improved by over $100 million, and the AOCI net of tax improved by $50 million. 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 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, The $6.5 million is significantly less than the expenses that we avoid if we had not sold these rail cars. So some retrofitting expenses. So I'm happy about that as well. So what are we seeing in the marketplace? The marketplace, you know, dare I say we're seeing a soft landing where we're seeing sort of the perfect sort of thing which we're all worried that the Fed will never be able to achieve, but it might be actually achieving that. On Main Street, we're not seeing a slowdown. We're not seeing a slowdown either in loan demand or in margins. We're not seeing concerns in the credit beyond 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 beginning to feel more optimistic than even three months ago. With that in mind, I would say that, you know, for 2024 guidance, what we will say to you is given what we see in the economy and the rate environment, it feels like this year, you know, the strategy is going to stay the same, by the way. It's to improve the left side of the balance sheet like I just described we've been doing over the last couple of quarters, the last three quarters, and also improving the right side of the balance sheet. So we finished our planning for the year just a couple of weeks ago. And what it comes out to is high single-digit growth in deposits, not including brokers. So brokers would actually want to take down, continue to take down FHLV. And on the lending side, again, on the CNICRA front, high single-digit growth. RENDI will continue to shrink, probably similar to the amount that it shrank this year, if it were to take. And NIDDA is where the focus will remain. And we'd like NIDDA... get back over 30%. It's hard to say when that will 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 still will be the most important thing we'll be chasing. Margins should continue to improve. The first quarter will probably be flattish, give or take one or two basis points. But after that, margin is a steady increase up into all of this year and into next year. And expenses will be mixing with this in terms of expense growth. Am I missing anything? Or you can fill in if I'm missing anything else. And in terms of capital, at least, you know, this is a question that will come up with the very first questions. I might as well answer it. So for the time being, we stay on the sidelines of share repurchases. At the February board meeting, 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 dividend discussion that is coming up in February, and I do expect the board to act positively on that.
spk04: With that, let me turn it over.
spk19: 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 love speaking. But just as a disclosure, I may have to stop. But Leslie, I'll turn it over to you.
spk08: You go to me.
spk19: I'll talk first.
spk08: Okay. Thanks, Raj.
spk19: So first off... Turn it off there, Raj.
spk08: Yeah, I got a little confused there. 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 were grown by 604, excluding the non-broker piece. The overall pipeline for deposits still continues to look very robust. Our near-term pipeline is about $1 billion, 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. As Raj outlined, consistent with strategy, Resi did decline by $172 million. Cree was up by $77 million for the quarter. We were happy with that growth. The CNI growth across all segments, lines, geographies, specialties, was up almost $400 million, $399 million for the quarter. So that was an excellent quarter for us in the CNI area. And mortgage warehouse was also actually 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 We're down modestly, and those will probably continue to trend in that direction for 2024. We're optimistic about the growth of Core C&I and Cree 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 and the 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 CNI pipeline in all areas of that corporate banking, commercial, and the small business unit. We're seeing good quality opportunities across the franchise. We do think, as we look towards the latter part of the year, we did have Cree growth for the year. I think we're pretty well positioned from a Cree perspective to you know, as we head into the year, given that, you know, our overall numbers in the CRE portfolio are fairly modest at, you know, 23.6% of total risk-based capital. Of loans. Of loans, I'm sorry, total loans. And 13% of construction on total risk-based capital. So we've got plenty of opportunities in the future. The market now at rates where they are is a bit, muted, but also as we talk 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 much larger CRE 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 right market performs the way It's expected to perform. 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. 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 in its fixed rate. Everybody's favorite topic is office, so let's talk a little bit about office. 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 kind of office sort of nationwide. 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. It was also down in the third quarter by $30 million, so we're down $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 LTV of the office portfolio was 65%. Weighted average debt service coverage ratio was 1.7 at December the 31st. We've provided some of the breakdown of those numbers by geography on slide 12. Substantially, all of the portfolio was performing, and 92% was pass rated at December the 31st. Overall, the portfolio continues to perform well, is characterized by strong sponsors who are supporting underlying properties, generally with 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. Substantially, all of the portfolio is suburban. There's 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. 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 in Long Island, in the boroughs, and the surrounding tri-state area. Overall rent rollover in the next 12 months is a small portion of the portfolio at 11%. $146 million of CREE office were rated below pass at 12-31-23. This compares to $90 million at 9-30-23, an increase of $56 million. Most of this increase is a result of tenants vacating space in some buildings, which 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 release 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'll work through parts of this. With that, I'll turn it over to Leslie for more details on the quarter.
spk33: Okay, thanks, Tom. 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. That compares to a gain of $4.2 million on similar transactions last quarter, so you see a pretty big $10 million swing in 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 to anything material in the aggregate in terms of gains and losses, although it could be lumpy. NEM was 260 for the quarter compared to 256 last quarter. Earning asset yields went up from 552 to 570. The yield on securities increased from 548 to 573. There were some coupon resets in there. Some of these things only reset quarterly or annually, so we're still seeing coupon resets filter through the portfolio. and some retrospective accounting adjustments. The yield on loans was up from 554 to 569. Cost of deposits was up 22 basis points to 296. 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 quarter over quarter, which is a good sign. 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 margin. 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. 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 sheet. It's a result of the transformation 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. That's not going to change the picture. 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 The NIM is balance sheet composition, not what the Fed does. Our forecast does have four cuts in it, one each quarter, but that's not really the driver. And we see NIM getting into the high twos by the end of 2024. 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. provision this quarter was $19 million and the ACL to loans ratio increased from 80 to 82 basis points. The ratio of the ACL to non-performing loans increased to 160 from 143. 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 this quarter. I would say for 2024, we do expect the ACL to continue to build as a percentage of the portfolio as composition shifts more towards commercial versus residential loans, and the commercial loans obviously generally carry higher reserves. 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 get that particularly with respect to office, we're living in a little bit different world now than we have been historically, but that is a lot of cushion. Non-interest income and expense, we already talked about the FDIC special assessment and the rail car sale. The increase in comp compared to the credit quarter, 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. I don't think there's anything else of note to talk about in non-interest income and expense. The ETR was low this quarter, mainly because of state RTP true-ups and the outsized impact they have on the ETR in a quarter where the pre-tax earnings number is a little lower. Excluding any discrete items, I would expect the ETR for next year to be around 25.5%. And that's all I have.
spk29: I'll turn it over to Raj for any closing remarks he wants to make.
spk19: No, listen, you know, given where we're coming from over the next is a pretty good place the progress that we've made when 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 it impacts our bottom line so when I look to 2024 I you know haven't felt this optimistic in quite some time so it's a good place to start the year Operator, we're ready for Q&A.
spk13: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered, you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster.
spk03: Our first question comes from Will Jones with KBW.
spk13: Your line is open. Hey, Greg. Good morning, guys.
spk24: Morning, Will. Hey, 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 of the balance sheet composition that's go around as opposed to, you know, what rates do moving forward, but I guess the question is, you know, the loan side is, you know, in process of changing. You guys have, you know, 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? Yeah, go ahead.
spk19: Yeah, I mean, we haven't, we can't tell you mathematically, like, what part of it comes from one side or the other, but it's both. I mean, work needs to be done both sides. And the comment that Leslie made about the Fed moves, you know, in our base numbers, we just use whatever the forward curve was, which was four cuts. When we put the pencils down. Right, exactly, a month ago when we put pencils down on our own budget. But, you know, if it was two cuts or three cuts or four cuts or five cuts, it doesn't really matter. That's how the balance sheet is structured right now. Now, if it's something really out of Leslie's day, You know, if they, you know, go down 10 cuts or something, you know, something silly like, oh, raise rates four more times, then it'll be a different thing. But, you know, an extra cut or two or less, it doesn't really matter the guidance we're giving. It has more to do with our ability to keep doing what we've done in the last three quarters.
spk33: And I will say, Will, the expansion that you've seen over the last couple quarters has been more related to funding mix. But going forward, we're really starting to get some good traction on the C&I and Cree core growth. So I think it's both going forward, not more one than the other. Yes, Sarah, let's do it.
spk24: Yeah, no, I absolutely think both sides are important. Yeah, but just in terms of the loan remix you guys are doing, you know, rolling off Resi and adding on C&I and CRE, where do you see that tradeoff in yields on a portfolio as you kind of roll off, you know, some lower yielding stuff and then add on, you know, some of the newer loans?
spk33: I mean, today, well, the C&I increase stuff is coming on around 8, give or take, you know, maybe a little more. And the resi stuff that's rolling off, I mean, the resi portfolio has an average yield in the mid-3s. 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, you know, the spreads that we're putting on on new commercial production are wider than the spreads on commercial loans that are rolling off, even if it's all floating rate products. Some of that is market conditions, and some of that is that we're just doing a slightly different kind of business. We've moved away from some of the SNICs and things that we were doing and doing more bilateral relationship-based business, which also tends to come on in a little bit wider spread.
spk08: 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. So we see, you know, incremental margin improvement in each of the lending teams.
spk19: All of that is happening. And that's what the pipeline looks like. You know, at some point, maybe spreads will come back tighter, but we don't see that yet.
spk24: Yeah, okay. That makes sense. And Raj, I'll ask, because I feel like this is, you know, an important moment for you guys. It feels like there's quite a bit of optimism as, you know, 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 where 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? Yeah.
spk19: You know, I know in terms of expenses and operating leverage, you know, I'd rather achieve that through, you know, the revenue side than from the expense side. Yeah. You know, 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 left. 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 margins. At some point, we'll come talk to you about growing the total balance sheet as well. It may not be in the next two, three quarters because it's still a transforming balance sheet as a story. But Leslie is kicking me under the table because I'm not supposed to talk about 2025. But if I was to take a wild guess, I would say that 2025 and beyond, I think we go back to the normal world of growing the balance sheet rather than just transforming it.
spk24: Yeah, okay. Great color. Last quick one for me. The gains and losses that you guys see, you know, selling operating lease equipment, is that ordinary course of business for you guys, or were those really kind of more one-time?
spk33: I think we are 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 one time, 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, I don't expect it to be net-net material over the course of the next year.
spk24: That's true. So all is equal. I mean, 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 future.
spk19: No, it should shrink. It's been shrinking for the last three years. It'll continue to shrink. The growth will come from our core footprint business, CNICRE, small business, not from what we call the BFG, which is the bridge finance business, which is franchise finance and equipment finance. Both of those businesses, we have them in rundown.
spk08: Yeah, if you went back three years ago, our UPB would have been $2 billion. Today, it's about $650 million. Yeah.
spk10: That won't grow.
spk24: Okay. Well, that's super helpful. Thank you, guys.
spk03: One moment for our next question. Our next question comes from Tim Moore-Brazil with Wells Fargo. Your line is open.
spk20: Hi. Good morning. 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 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.
spk33: 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. 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, when rates are coming down, the marginal cost of new business is going to be higher than the total cost of the back book. So on the way up, maybe not so much, you know, the back book. But on the way down, you are going to have the marginal cost of new business still being a little bit higher than the cost of the back book because the cost of the back book doesn't equal the marginal cost. So in the aggregate, when you look at it all together, because of that phenomenon, it will appear to be a little slower.
spk19: We do have one more quarter of CDV pricing, which is the quarter we're in right now. Yes. After that, when we look at our CD maturity, it just drops off pretty significantly after March. Last quarter, fourth quarter was pretty big, and this quarter is also big. And then second quarter is really, really small into the rest of the year. So that's one element of it. The second element, obviously, is new money that is coming in compared to where the average it pretty high until the Fed cuts. But the existing book repricing should start to basically, you know, that phenomenon should be over in about, you know, maybe eight more weeks.
spk33: Yeah, agreed. And that receding repricing phenomenon is one of the reasons we didn't guide to margin expansion in the first quarter.
spk20: Got it. That makes sense. And then, you know, it's encouraging to hear that non-interest bearing migration and 4Q was more so seasonal in nature. I'm wondering, do you think that the excess liquidity and the risk of kind of additional non-interest bearing flight is 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?
spk19: Yeah, I mean, our title business is has grown very nicely, we're very happy with it. That's where most of that seasonality is coming from. It's basically mortgage origination, mortgage banking related deposits. And they do, they follow a pretty routine cycle. They're always weaker in the middle of the month, middle of the quarter. They're always stronger 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. 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 that will start building up. Summer is when business is the hottest and these things build up over time. But also So most of that happened in that business. There was a little bit of outflow from some accounts, but I would call that sort of ad hoc if stuff like that happens. Sometimes they're inflows, sometimes they're outflows. But I'd say 75% of that outflow really was in mortgage-related, and it happened pretty late in the quarter. Which is why on average, you see hardly any change.
spk32: and balances was a significant growth. It's a regular December 31st phenomenon.
spk20: Got it. And then just a couple CRE-related questions. It looks like office LTVs picked up a little bit quarter over quarter in New York. Maybe just talk us through some recent reappraisals that you've had in New York, primarily Manhattan, what you're seeing as far as LTV migration on the tails there.
spk33: Let me say a couple things about that. Some of that's reappraisal. Some of that is modeled because when we don't have a new appraisal, our models actually take commercial property forecasts at the detailed submarket level and adjust the LTVs. So some of that is modeled and some of that is actually reappraisal. Tom, do you have anything to add?
spk08: Yeah. I would say 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, the only maturities that we've seen actually paid off. So we were not looking at, you know, new appraisals. And I would say the information we hear kind of anecdotally not related to our specific portfolio because We just don't have a large enough sample and didn't have enough majorities to say that. I would say it's largely going to point towards valuations being down, you know, maybe 20%, something in that kind of range. But it's very much also a building-by-building, you know, issue depending upon the occupancy and debt service coverage and debt yields and things in that building. There's not, like all real estate, you know, 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 internally to go off.
spk33: And I will say, you know, the LTDs remain very strong. A lot of cushions still there.
spk20: Great. And then just Lastly, New York City multifamily, what portion, if any, is rent regulated and what portion is 2019 or earlier vintage?
spk33: We have $121 million worth of New York City rent regulated exposure. It's insignificant at this point.
spk08: Thank you. Yeah, I'd also come back on the loan to value issue in New York. Loan to values are important, but also investor basis in the property. is extremely important. And when you have, you know, our client base is a traditional generational-owned, you know, 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 they support buildings if there's any short-term, you know, swings in occupancy and debt service coverage ratios and things of that nature.
spk02: Great. Thank you for that, Collin.
spk03: One moment for our next question. Our next question comes from David Rochester with CompassPoint. Your line is open.
spk05: Hey, good morning, guys.
spk11: Good morning, Dave.
spk05: Just a point of clarification on the expense guide. That's off of expenses X, the FDIC special, or is it including that? Excluding it, right?
spk36: Yeah, thank you for making that.
spk05: Okay, sure. I just want to make sure. 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.
spk33: I know, and I'm a little bit hesitant to do that because there are just so many factors that could move that a few basis points in one direction or the other. So I'm a little hesitant to give you a point estimate because whatever point estimate I give you is going to be wrong.
spk05: Gotcha. Whatever gets you to mid-singles on NII?
spk38: Yeah.
spk05: 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? If 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?
spk33: 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 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 running that business that are going to come down. So while that fee income line will come down, that net, this will be a boost to the bottom line.
spk09: Yeah, I would agree with that.
spk05: 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?
spk31: The fee income line, it'll probably run $0.8 and $9 million a quarter. Okay.
spk05: And maybe one last one. 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, the tangible here while you still have it?
spk19: of a recession or a slowdown. I'd rather deploy this capital, honestly, into long growth. I know we're not talking about total growth this year as much, but into next year, we are thinking about that. Even the bond portfolio is an example, which we've been shrinking. At some point this year, it'll stop shrinking. So overall, we're also gearing for balance sheet growth in the out years. and also looking at still uncertainty in the system, so put that all together, at least in the very short term, I think we'll stay on the sidelines, but I don't want to speak for the Board of Entities, 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 to discuss. My guess is they will probably defer it into probably the second half of the year, but you know, We can change. We do actively discuss it every board meeting.
spk08: I wanted to come back on one point on your rail car question as it related to the comment about underwater. It's not so much that we're underwater from a residual to NOLV kind of analysis perspective. It's that 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 in 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.
spk13: Great. Sounds good. Thanks, guys.
spk03: One moment for our next question. Our next question comes from John Ashton with RBC. Your line is open.
spk07: Hey, good morning. Good morning, John. 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. So question one is do we assume down another, you know, five, you know, I guess a little under a billion, and how long does this continue to go?
spk19: I think you should expect this year seven, eight hundred million more this year and we're not giving guidance for next year but I think that trend is sort of, you know, will kind of continue because I still think we're way over allocated to Resi despite it being a very safe asset, it just doesn't have the yield and the spread. Yeah, I think we did something. I forget the exact number this year, but it'll be a similar number. In 23, it'll be a similar number in 24 in terms of production.
spk07: Have you ever shared an optimal percentage for resi?
spk19: I'd say, you know, kind of what it used to be before the pandemic. So I think there's a way to go a couple of years to go before we do this.
spk07: 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? What is the strategy to do that?
spk17: Well, grind it out. How much time do you have?
spk06: No magic wand.
spk19: Grind it out. We were over 30% a couple of years back. Now, obviously, that was in a very different monetary environment than we're in today, but you know, at the beginning of the year, we often come up with sort of a slow rhythm for the company to sort of rally behind. We want the company to rally behind. And I point with the idea of, you know, putting that up and saying, you know, that's what we got to do. So there's no magic to a 30%. It's just that if you were at 30 to 33%, and I know certainly commercial banks that are even higher than that, we should strive for a three handle. So, but there isn't a sort of, you know, well thought out sort of, logic to this is why you get there. What we will say is the pipeline that we now track closely than anything else in the company with the treasury pipeline, account by account, which we spend hours every week focusing on, is pretty decent. It's very robust. 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 something which we can achieve in the next couple of years.
spk08: I would add to that since I'm generally in the middle of the battle every day on this. 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 ex-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, all put our strategy, you know, 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 alluded to, is intense focus on it.
spk19: You do have to... Pick your spots based on where the money is, where the industry goes. Then go in and actually look at where the pain points are in those industries and those little spots that you pick. And it generally takes a multi-year effort to solve those pain points with a combination of technology and process. And then you hit the market and you're able to gather market share. That's been the formula for success. It doesn't happen in a year. A lot of these things take multiple years. but when they do work out it's hard for people to replicate and that's how this entire business has been built and there are things in the pipeline that we're working on even now that we don't talk about openly because it's too early to talk about them but they are about solving those pain points that bigger banks or even sometimes banks our size are just not focused on and we do.
spk08: If you're a football fan it's Four yards in a cloud of dust every day.
spk07: Yeah, OK. I thought it was three yards, but I'll give you four, Tom.
spk34: We're better than that.
spk07: Yeah, OK, you're better than that. The dolphins, they run. 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 little better economic forecast, but I'm kind of circling that risk migration or risk migration and specific reserves. Is that mix or is that, you know, true risk migration or what's behind that build and, and then, How material of a bill do you expect for this going forward as the mix changes?
spk33: Yeah, what you see there this quarter corresponds to the, you know, to the increase that you saw in criticized classified assets and, you know, 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. You know, 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 Farad says, 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.
spk18: But it also includes the ship from Redleaf to... That's not in that column.
spk19: In general, yeah. As the CNI bills, CRE bills, and RECU end up, you should expect the 82 basis points.
spk16: All that will be equal. It will go up. It will go up, yeah.
spk19: Because we just, you know, against CNI, we have higher.
spk33: Yeah, if nothing else happens, if everything else stays 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 compositional shift. That's to be expected. I mean, you can see right now we've got 1.53% reserve on C&I and a 0.09% reserve on residential.
spk08: I would also say we have a very well-disciplined and thought process around risk rating. And we risk rate loans 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 cashflow does not start to kick in for six months. We graded based upon the cashflow today, not the cashflow six months from now. So that will change. We'll see some of that happen, but we risk rate, I think very conservatively and appropriately.
spk07: Okay. All right. Thanks for the help. I appreciate it all.
spk13: One moment for our next question. Our next question comes from Ben Gerlinger with Citi. Your line is open.
spk04: Hey, good morning, everyone.
spk40: Morning, Ben.
spk15: I just wanted to circle back. I know I've thrown out a lot of guidance and ranges. 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 of 23. 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?
spk33: $20, $21, what? I'm sorry.
spk15: Oh, I'm sorry, for total non-interest income.
spk33: All right. 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. They gave you the number for lease income. Probably the other will trend up a little bit too. I don't have that number right in my head.
spk15: Sure. Yeah, no big deal. Okay, sounds good. I feel like I got most of the guidance right then. So when you guys just think from the kind of lending and philosophical perspective, you said you guys are getting a little bit better rate, especially on even floating rate. Are you potentially introducing credit risk 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 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?
spk19: I think it has everything to do with the fact that So, there is, the cost of money has gone up, spreads are wider for that reason. 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 to the borrowers. Same credit, same risk rating, same names, something that is coming up for a little, you will get wider spreads in this market than, let's say, 18 months ago. So, it is not about that we're going down the credit spectrum, it is that the market is in a different place than it was competitively for borrowing a year ago. That's what is driving wider spreads. But like I said, we're also paying up on the other side. That's why if it is only on the lending side that we're getting wider spreads and deposits was in a happy place like a year and a half ago, our markets would be way wider. That's not the case. there's less competition.
spk15: Gotcha. Okay. That's fair. And then when you think about kind of the holistic approach to expenses, I know there's a cadence kind of with the seasonality. Some years it's more pronounced than others. I'm just curious if you kind of just
spk33: quarter to quarter like where might the high point be or how do we structure we think about the back half of the year we don't really try to provide quarter by quarter guidance I don't know when you know certain things are going to hit the P&L you know you typically have a little bit higher payroll expense in the first quarter everybody does because of the front loading of payroll taxes and 401k contributions and HSA seating and all of those things but beyond that We don't spend a lot of time trying to figure out which quarter expenses are going to hit the P&L. All right.
spk11: That's fair. I appreciate it. Thanks, Chris.
spk13: One moment for our next question.
spk03: Our next question comes from Steve and Alex Vassilos with J.P.
spk13: Morgan. Your line is open.
spk22: Hi. Good morning. This is Alex Lau on for Steve.
spk12: Hey, Alex. How are you?
spk22: 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 CDs running off and the new rates that CDs were coming on at? Thank you.
spk33: 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 that's probably going to reprice up on average by about 50 basis points.
spk19: In terms of new money coming in, and I don't recall exactly where the pricing is right now, but I do know that we backed off on the deposit pricing on CD pricing right around Thanksgiving. So we may have done it actually twice, right after Thanksgiving and then once again in December. So we did lower meaningfully what our promotional rates were for 12-month money, which is sort of our lead product. But I don't have the exact numbers in front of me. But I do remember making those decisions back then. Yeah, high boards, I think, is where we are.
spk22: Got it. Thank you for the color. Moving on to deposits. which business segments or industry 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?
spk08: 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, it's across all segments. It would be I wouldn't have the detail in front of me to give you like 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, it's hundreds of opportunities across all of our business units. Very widespread, yeah.
spk22: 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 now? Thanks.
spk08: Yeah, I would say when we track the pipeline through various stages, I would say our pull-through rates, you know, once we get to proposal rate are pretty high. from 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, you know, obviously before a proposal, when something is in dialogue, you know, then it's less. But once we get to proposal stage, our realization rate is pretty high.
spk19: By the way, somebody just texted me or our team, 12 months,
spk22: 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.
spk33: We're probably not that focused on the efficiency ratio, to be honest. We're more focused on expenses to assets and those types of things. I think our guidance is a mid-single digit increase in expenses. We don't spend a lot of time thinking about the efficiency ratio, to be honest with you.
spk21: Thank you for taking my question.
spk33: Yeah, not the efficiency ratio. There's just so many components to that. You know, the rate environment is going to affect that. You know, balance sheet transformation is going to affect that. So we'd rather just focus on the components, yeah.
spk02: Got it.
spk13: Thank you.
spk03: One moment for our next question. Our next question comes from Zachary Westerlund with UBS.
spk13: Your line is open.
spk14: Hi, everyone. It's Zach on for Brody. 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 past three quarters. I was just curious what's driving that and what's the trajectory looking like over the next couple quarters?
spk33: I think what's been driving it is coupon rate increases for the most part. That's probably about done, so the trajectory is probably more likely down than up, particularly if we get rate cuts.
spk14: 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?
spk33: I think next quarter it's going to be up because we're still We've got the CD repricing. We still haven't had any rate cuts. If the forward curve comes to fruition, it'll start trending down over at least the back half of the year, maybe as soon as the second quarter, depending on what the Fed does.
spk03: Awesome. Appreciate it.
spk13: I'm not showing any further questions at this time. I'd like to turn the call back over to Rosh for any closing remarks.
spk19: I'll close by saying After a fairly difficult 2023, we're starting the year 2024 on a very positive note. The business has got momentum in all the right places that we worked so hard on, and the economy and the things that we don't control are also favoring us, especially the markets that we're in. So all that gives me a lot of hope for what 2024 will be. It is still a lot of work for us to do, but the team is energized to hit the road and keep building through 2024. Thank you all for joining us. If you have any questions, of course, you can reach me and Leslie directly. We'll talk to you otherwise again in three months. Thank you. Bye.
spk13: Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day. you I'm going to add a new layer to the top layer. Thank you.
spk42: Thank you.
spk13: 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 on a listen-only mode. 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 1-1 on your telephone. You will then hear an automated message advising 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.
spk25: Thank you, Kevin. Good morning, and thank you for joining us today. On the call this morning are Raush 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 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 services industry. 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 to differ materially from those indicated by the forward-looking statement. 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 H. which are available at the SEC website, www.sec.gov. With that, I'd like to turn the call over to Raj.
spk19: Thank you, Susan. Good morning, everyone, and thank you for joining us for the earnings call. 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 roughly were, you know, if we could summarize them by saying improve the balance sheet, do then improve the P&L, and improve the balance sheet means on the left side of the balance sheet, you know, it relied less on resi and bonds and more CNI and CRE growth. On the right side of the balance sheet relied more on core funding, defend DDA, and if you did all that, margin would expand, and of course, center, given that we're at 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 the fourth quarter of 2023 was the continuation of that story. Deposits grew nicely, $426 million, despite the fact that includes a couple hundred million of brokerage coming down, so excluding $604 million. NIDDA was down for a seasonal adjustment. It literally happened in the last two, three days of the quarter. Average DDA were actually down only $28 million, but period end were down more. And on wholesale funding came down as it did last quarter. FHLB brokered. Everything was down. 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, I was seeing like it might be a flat quarter for CRE, but it also grew. So total between CNI and CRE, we grew $476 million. On credit, oh, by the way, you know, all of this led to margin expansion again. so margin expanded from 256 last quarter to 260, and if we keep doing this, margin will keep expanding, and we'll talk about it next year in a little bit. Let me just go through the rest of the fourth quarter first. NPAs, on the credit side, NPAs take down from 40 basis points to 37 basis points, and if you exclude SBA loans, then it's actually at 25 basis points. So NPAs are getting to a place where they're so low That will be harder to drive them down. Charge-offs, nine basis points for the year. If you compare that to last year, I think we were at 22 basis points, if I remember right. So charge-offs for the full year have been, you know, fantastic. 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. Yeah. So 82 basis points. It was 80 basis points last quarter. Criticized assets did increase this quarter, as you would expect this time in the cycle. But overall, in 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 at night. Capital is robust. SEC 1 is now 11-4. And TCE to TA also is now at 7%. Unrealized losses in the securities portfolio improved by over $100 million. And the AOCI net of tax improved by $50 million. And that liquidity position stayed strong, so that's almost become a moot point at this juncture. So, by the way, there were a couple of sort of notable items in the P&L which we highlighted in the earnings release. The FDIC assessment, which 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, which the $6.5 million is significantly less than the expenses that we avoid 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 be actually achieving that. On Main Street, we're not seeing a slowdown. We're not seeing a slowdown either in loan demand or in margins. We're not seeing concerns in the credit beyond 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 beginning to feel more optimistic than even three months ago. With that in mind, I would say that for 2024 guidance, what we will say to you is given what we see in the economy and the rate environment, it feels like This year, you know, the strategy is going to stay the same, by the way. It's to improve the left side of the balance sheet, like I just described, we've been doing over the last couple of quarters, the last three quarters, and also improving the right side of the balance sheet. So we finished our planning for the year just a couple of weeks ago, and what it comes out to is high single-use growth in deposits, not including brokers. So brokers would actually want to take down, continue to take down FHLV. And on the lending side, again, on the CNICRA front, high signal visits growth. RENDI will continue to shrink, probably similar to the amount that it shrank this year, if it were to take. And NIDDA is where the focus will remain. And we'd like NIDDA get back over 30%. It's hard to say when that will 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 still will be the most important thing we'll be changing. Margins should continue to improve. The first quarter will probably be flattish, give or take one or two basis points. But after that, margin is a steady increase up into all of this year and into next year. And expenses will be missing a little in terms of expense growth. Am I missing anything? Or you can fill in if I'm missing anything else. And in terms of capital, at least, you know, this is a question that will come up in the very first questions. I might as well answer it. So for the time being, we stay on the sidelines of share repurchases. At the February board meeting, 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 dividend discussion that is coming up in February, and I do expect the board to act positively on that.
spk04: With that, let me turn it over.
spk19: By the way, I'm recovering from a cold. 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 love speaking. But just as a disclosure, I may have to stop. But Leslie, I'll turn it over to you.
spk08: You go to me.
spk19: I'll talk first.
spk08: Okay. Thanks, Raj.
spk19: So first off... Turn us off there, Raj.
spk08: Yeah, I got a little confused there. 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 were grown by 604, excluding the non-broker piece. The overall pipeline for deposits still continues to look very robust. Our near-term pipeline is about $1 billion, which is heavily dominated by operating account business and NIDDA business, in line with Roger'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. As Raj outlined, consistent with strategy, Resi did decline by $172 million. Cree was up by $77 million for the quarter. We were happy with that growth. And the CNI growth across all segments, lines, geographies, specialties, was up almost $400 million, $399 million for the quarter. So that was an excellent quarter for us in the CNI area. And mortgage warehouse was also actually 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 We're down modestly, and those will probably continue to trend in that direction for 2024. We're optimistic about the growth of Core C&I and Cree 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 and the 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 CNI pipeline in all areas of that corporate banking, commercial, and the small business unit. We're seeing good quality opportunities across the franchise. We do think, as we look towards the latter part of the year, we did have Cree growth for the year. I think we're pretty well positioned from a Cree perspective you know, as we head into the year, given that, you know, our overall numbers in the CRE portfolio are fairly modest at, you know, 23.6% of total risk-based capital of loans. I'm sorry, total loans and 13% of construction on total risk-based capital. So we've got plenty of opportunities in the future. The market now at rates where they are is a bit, muted, but also as we talk 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 much larger CRE 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 perform. 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. At December 31st, the weighted average LTV of the CRE portfolio was 56% and the weighted average debt service coverage ratio was 1.80. About 16% of the CRE portfolio matures in the next 12 months and about 8% matures in the next 12 months in its fixed rate. Everybody's favorite topic is office, so let's talk a little bit about office. 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 kind of office sort of nationwide. 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. It was also down in the third quarter by $30 million, so we're down $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 LPVA of the office portfolio was 65%. Weighted average debt service coverage ratio was 1.7 at December the 31st. We've provided some of the breakdown of those numbers by geography on slide 12. Substantially, all of the portfolio was performing, and 92% was pass rated at December the 31st. Overall, the portfolio continues to perform well. It's characterized by strong sponsors who are supporting underlying properties, generally with 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. Substantially, all of the portfolio is suburban. There's 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. 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 in Long Island, in the boroughs, and the surrounding tri-state area. Overall rent rollover in the next 12 months is a small portion of the portfolio at 11%. $146 million of Cree office were rated below pass at 1231.23%. This compares to $90 million at 9-30-23, an increase of $56 million. Most of this increase is a result of tenants vacating space in some buildings, which 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 release 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'll work through parts of this. With that, I'll turn it over to Leslie for more details on the quarter.
spk33: Okay, thanks Tom. So net income from the quarter was 20.8 million or 27 cents 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. That compares to a gain of $4.2 million on similar transactions last quarter, so you see a pretty big $10 million swing in 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 to anything material in the aggregate in terms of gains and losses, although it could be, won't be. NEM was 260 for the quarter compared to 256 last quarter. Earning asset yields went up from 552 to 570. The yield on securities increased from 548 to 573. There were some coupon resets in there. Some of these things only reset quarterly or annually, so we're still seeing coupon resets filter through the portfolio. and some retrospective accounting adjustments. The yield on loans was up from 554 to 569. Cost of deposits was up 22 basis points to 296. 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 quarter over quarter, which is a good sign. 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 margin. 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. 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 sheet. It's a result of the transformation 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. That's not going to change the picture. 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 The NIM is balance sheet composition, not what the Fed does. Our forecast does have four cuts in it, one each quarter, but that's not really the driver. And we see NIM getting into the high twos by the end of 2024. 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.
spk35: I'll slide feet there.
spk33: provision this quarter was $19 million and the ACL to loans ratio increased from 80 to 82 basis points. The ratio of the ACL to non-performing loans increased to 160 from 143. 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 this quarter. I would say for 2024, we do expect the ACL to continue to build as a percentage of the portfolio as composition shifts more towards commercial versus residential loans. And the commercial loans obviously generally carry higher reserves. 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 get that particularly with respect to office, we're living in a little bit different world now than we have been historically, but that is a lot of cushion. Non-interest income and expense, we already talked about the FDIC special assessment and the rail car sale. The increase in comp compared to the prior quarter, 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. I don't think there's anything else of note to talk about in non-interest income and expense. The ETR was low this quarter, mainly because of state RTP true-ups and the outsized impact they have on the ETR in a quarter where the pre-tax earnings number is a little lower. Excluding any discreet items, I would expect the ETR for next year to be around 25.5%. And that's all I have. I'll turn it over to Raj for any closing remarks he wants to make.
spk19: Listen, given where we're coming from, a pretty good place. The progress that we've made when 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 that's our bottom line. So when I look to 2024, I haven't felt this optimistic in quite some time. So it's a good place to start the year. I'll open this up for Q&A. Operator, we're ready for Q&A.
spk13: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered, you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster.
spk03: Our first question comes from Will Jones with KBW.
spk13: Your line is open. Hey, great. Good morning, guys.
spk24: Good morning. Hey, 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 of the balance sheet composition that's go around as opposed to, you know, what rates do moving forward, but I guess the question is, you know, the loan side is, you know, in process of changing. You guys have, you know, 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? Yeah, go ahead.
spk19: Yeah, I mean, we haven't, we can't tell you mathematically, like, what part of it comes from one side or the other. But work needs to be done both sides. And the comment that Leslie made about the Fed moves, you know, in our base numbers, we just use whatever the forward curve was, which was four cuts. When we put the pencils down. Right, exactly, a month ago when, you know, we put pencils down on our own budget. But, you know, if it was two cuts or three cuts or four cuts or five cuts, it doesn't really matter. That's how the balance sheet is structured right now. Now, if it's something really out of Leslie, you know, they, you know, go down 10 cuts or something silly like raise rates four more times, then it will be a different thing. But an extra cut or two or less, it doesn't really matter. It has more to do with our ability to keep doing what we've done in the last three quarters.
spk33: And I will say, Will, the expansion that you've seen over the last couple quarters has been more related to funding mix. But going forward, we're really starting to get some good traction on the C&I and CREDI core growth. So I think it's both going forward, not more one than the other necessarily.
spk24: Yeah, no, I absolutely think both sides are important. Yeah, but just in terms of the loan remix you guys are doing, you know, rolling off RESI and adding on C&I and CRE, where do you see that tradeoff in yields on the portfolio as you kind of roll off, you know, some lower yielding stuff and then add on, you know, some of the newer loans?
spk33: I mean, today, well, the C&I increase stuff is coming on around 8, give or take, you know, maybe a little more. And the resi stuff that's rolling off, I mean, the resi portfolio has an average yield in the mid-3s. 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, you know, the spreads that we're putting on on new commercial production are wider than the spreads on commercial loans that are rolling off, even if it's all floating rate products. Some of that is market conditions, and some of that is that we're just doing a slightly different kind of business. We've moved away from some of the SNICs and things that we were doing and doing more bilateral relationship-based business, which also tends to come on at a little bit wider spread.
spk08: 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. So we see, you know, incremental margin improvement in each of the lending teams.
spk19: All of that is happening. And that's what the pipeline looks like. You know, at some point, maybe spreads will come back tighter, but we don't see that yet.
spk24: Yeah, okay. That makes sense. And Raj, I'll ask, because I feel like this is, you know, an important moment for you guys. It feels like there's quite a bit of optimism as, you know, 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 where 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? Yeah.
spk19: You know, I know in terms of expenses and operating leverage, you know, I'd rather achieve that through, you know, the revenue side than from the expense side. Yeah. You know, 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 left. 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 margins. At some point, we'll come talk to you about growing the total balance sheet as well. It may not be in the next two, three quarters because it's still a transforming balance sheet as a story. But, you know, Leslie is kicking me at the table because I'm not supposed to talk about 2025. But if I was to take a wild guess, I would say that 2025 and beyond, I think we go back to the normal world of growing the balance sheet rather than just transforming it.
spk24: Yeah, okay. Great color. Last quick one for me. The gains and losses that you guys see, you know, selling operating lease equipment, is that ordinary course of business for you guys, or were those really kind of more one-time?
spk33: I think we are 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 one time, 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, I don't expect it to be net-net material over the course of the next year.
spk24: That's true. So all odds equal. I mean, 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 future.
spk19: No, it should shrink. It's been shrinking for the last three years. It'll continue to shrink. The growth will come from our core footprint business, C&I, CRE, small business, not from what we call the BFG, which is the bridge finance business, which is franchise finance and equipment finance. Both of those businesses, we have them in rundown.
spk08: Yeah, if you went back three years ago, our UPB would have been $2 billion. Today, it's about $650 million. Yeah.
spk10: That won't grow.
spk24: Okay. Well, that's super helpful.
spk13: Thank you, guys. Thank you. One moment for our next question.
spk03: Our next question comes from Tim Moore-Brazil with Wells Fargo.
spk13: Your line is open.
spk20: Hi. Good morning. Good morning. Good morning. 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.
spk33: 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. 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, when rates are coming down, the marginal cost of new business is going to be higher than the total cost of the back book. So on the way up, maybe not so much, you know, the back book. But on the way down, you are going to have the marginal cost of new business still being a little bit higher than the cost of the back book because the cost of the back book doesn't equal the marginal cost. So in the aggregate, when you look at it all together, because of that phenomenon, it will appear to be a little slower.
spk19: We do have one more quarter of CDV pricing, which is the quarter we're in right now. Yes. After that, when we look at our CD, maturity, it just drops off pretty significantly after March. Last quarter, fourth quarter, was pretty big, and this quarter is also big. And then second quarter is really, really small into the rest of the year. So that's one element of it. The second element, obviously, is new money that is coming in compared to where the average book back book in pretty high until the Fed cuts. But the existing book repricing should start to basically, you know, that phenomena should be over in about, you know, maybe eight more weeks.
spk33: Yeah, agreed. And that receding repricing phenomenon is one of the reasons we didn't guide to margin expansion in the first quarter.
spk20: Got it. That makes sense. And then, you know, it's encouraging to hear that, non-interest bearing uh migration and 4q was was more so seasonal in nature i'm wondering do you think that the excess liquidity and the risk of kind of additional non-interest bearing flight is 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 yeah i mean our title business is uh
spk19: has grown very nicely and we're very happy with it. That's where most of that seasonality is coming from. It's basically mortgage banking related deposits. And they follow a pretty routine cycle. They're always weaker in the middle of the month, middle of the quarter. They're always stronger 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 so close to it. 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 that will start building up. Summer is when business is the hottest and these things build up over time. Most of that happened in that business. There was a little bit of outflow from some accounts, but I would call that sort of ad hoc if stuff like that happens. Sometimes there are inflows, sometimes there are outflows, but I'd say 75% of that outflow really was in mortgage-related, and it happened pretty late in the quarter, which is why on average, you see hardly any change. But period imbalances was a significant growth.
spk32: It's a regular December 31st phenomenon.
spk20: Got it. And then just a couple CRE-related questions. It looks like office LTVs ticked up a little bit quarter over quarter in New York. Maybe just talk us through some recent reappraisals that you've had in New York, primarily Manhattan. what you're seeing as far as LTV migration on the tails there.
spk33: Let me say a couple things about that. Some of that's reappraisal. Some of that is modeled because when we don't have a new appraisal, our models actually take commercial property forecasts at the detailed submarket level and adjust the LTVs. So some of that is modeled and some of that is actually reappraisal. Tom, do you have anything to add?
spk08: Yeah. I would say 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, the only maturities that we've seen actually paid off. So we were not looking at, you know, new appraisals. And I would say the information we hear kind of anecdotally not related to our specific portfolio because We just don't have a large enough sample and didn't have enough majorities to say that. I would say it's largely going to point towards valuations being down, you know, maybe 20%, something in that kind of range. But it's very much also a building-by-building, you know, issue depending upon the occupancy and debt service coverage and debt yields and things in that building. There's not, like all real estate, you know, 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 internally to go off.
spk33: And I will say, you know, the LTDs remain very strong. There's a lot of cushions still there.
spk20: Great. And then just Lastly, New York City multifamily, what portion, if any, is rent regulated and what portion is 2019 or earlier vintage?
spk33: We have $121 million worth of New York City rent regulated exposure. It's insignificant at this point.
spk08: Thank you. Yeah, I'd also come back on the loan to value issue in New York. Loan to values are important, but also investor basis in the property. is extremely important. And when you have, you know, our client base is a traditional generational-owned, you know, 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 they support buildings if there's any short-term, you know, swings in occupancy and debt service coverage ratios and things of that nature.
spk02: Great, thank you for that caller.
spk03: One moment for our next question. Our next question comes from David Rochester with CompassPoint. Your line is open.
spk05: Hey, good morning, guys.
spk11: Good morning, Dave.
spk05: Just a point of clarification on the expense guide. That's off of expenses X, the FDIC special, or is it including that? Excluding it, right?
spk36: Yeah, thank you for making that
spk05: Okay, sure. I just want to make sure. 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.
spk33: I know, and I'm a little bit hesitant to do that because there are just so many factors that could move that a few basis points in one direction or the other. So I'm a little hesitant to give you a point estimate because whatever point estimate I give you is going to be wrong.
spk05: Gotcha. Whatever gets you to mid-singles on NII?
spk38: Yeah.
spk05: 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? If 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?
spk33: 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 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 running that business that are going to come down. So while that fee income line will come down, net net, this will be a boost to the bottom line.
spk09: Yeah, I would agree with that.
spk05: 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?
spk31: The fee income line, it'll probably run $0.8 and $9 million a quarter.
spk05: Okay. And maybe one last one. I know you already addressed this on the buybacks. It seems like you're speaking positively about loan growth. The C&I and CRE outlook is positive. You're talking about a soft landing. Credit trends are contained. Why not take advantage of the discount, the tangible here while you still have it?
spk19: Maybe I'm just being too conservative, but I kind of still feel there's more time that's needed to pass there's still a possibility of a recession or a slowdown. I'd rather deploy this capital, honestly, into low growth. I know we're not talking about total growth this year as much, but into next year, we are thinking about that. Even the bond portfolio is an example, which we've been shrinking. At some point this year, it'll stop shrinking. So overall, we're also gearing for balance sheet growth in the out years and also looking at still uncertainty in the system. So put that all together, at least in the very short term, I think we'll stay on the sidelines. But I don't want to speak for the Board of Entities, 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 to discuss. My guess is they will probably defer it into probably the second half of the year. But, you know, we can change. We do actively discuss it every board meeting.
spk08: I wanted to come back on one point on your rail car question as it related to the comment about underwater. It's not so much that we're underwater from a residual to NOLV. kind of analysis perspective. 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 in 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.
spk13: Great. Sounds good. Thanks, guys.
spk03: One moment for our next question. Our next question comes from John Astrum with RBC. Your line is open.
spk07: Hey, good morning. Good morning, John. 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, you know, I guess a little under a billion, and how long does this continue to go?
spk19: I think you should expect this year 700, 800 million more this year. And we're not giving guidance for next year, but I think that trend is sort of, you know, will kind of continue because I still think we're way over allocated to Resi. despite it being a very safe asset. It just doesn't have the yield and the spread. So, yeah, I think we did something. I forget the exact number this year, but it'll be a similar number. In 23, it'll be a similar number in 24 in terms of production.
spk07: Have you ever shared an optimal percentage for resi?
spk19: I'd say, you know, kind of what it used to be before the pandemic. So I think there's a way to go a couple of years to go.
spk07: 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? What is the strategy to do that?
spk17: Well, grind it out. How much time do you have?
spk06: No magic wand?
spk17: Yeah, grind it out.
spk19: We were over 30% a couple of years back. Now, obviously, that was in a very different monetary environment than we're in today. But at the beginning of the year, we often come up with sort of a slogan for the company to sort of rally behind. We want the company to rally behind. And I point with the idea of putting that up and saying, you know, that's what we got to do. So there's no magic to a 30%. It's just that if you were at 32%, 33%, and I know certainly commercial banks that are even higher than that, we should strive for a three handle. But that isn't a sort of, you know, well thought out sort of logic to this is why you get there. What we will say is the pipeline that we now track closely than anything else in the company with the treasury pipeline, account by account, which we spend hours every week focusing on, is pretty decent. It's very robust. And that gives me the confidence to say that I think that is an attainable goal. It may not happen in the next two, three quarters, but it will certainly be something which we can achieve in the next couple of years.
spk08: I would add to that, since I'm generally in the middle of the battle every day on this, that 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 ex-bank to our bank. You have to be focused on market segments that are predominantly more deposit-rich than others. There are some industries that drive significant deposits and some that don't. So we have, over the last few years, altered our strategy to be very focused on the types of industries where you do 10% to drive significant deposit levels. And the third is just, back to something Raj alluded to, is intense focus on it.
spk19: You do have to pick your spots based on where the money is, where the industry is. Then go in and actually look at where the pain points are in those industries, in those little spots that you pick. 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 and you're able to gather market share. That's been the formula for success. It doesn't happen in a year. A lot of these things take multiple years. But when they do work out, it's hard for people to replicate. And that's how this entire business has been built. And there are things in the pipeline that we're working on even now that we don't talk about openly because it's too early to talk about them. But they are about solving those pain points that bigger banks or even sometimes banks our size are just not focused on, and we do.
spk08: If you're a football fan, it's four yards in a cloud of dust every day.
spk07: Yeah, okay. I thought it was three yards, but I'll give you four, Tom.
spk34: I'm better than that.
spk07: Yeah, okay, you're better than that. The dolphins, they run. 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 had a little 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... How material of a bill do you expect for this going forward as the mix changes?
spk33: 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. You know, 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 Ross says, we're not losing sleep over credit. But you will continue to see some normalization of credit. So there will probably be a little bit of that.
spk18: But it also includes the ship from Red League. That's not in that column.
spk19: In general, yeah. As the CNI builds, CRE builds, and RECU ends up, you should expect the 82 basis points.
spk16: It will go up.
spk33: Because we just, you know, against CNI, we have higher... If nothing else happens, if everything else stays 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 compositional shift and That's to be expected. I mean, you can see right now we've got 1.53% reserve on C&I and a 0.09% reserve on residential.
spk08: I would also say we have a very well-disciplined and thought process around risk rating. And we risk rate loans what they are at this exact moment, not what we think they'll be six months from now. And if you have a building... 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 upon the cash flow today not the cash flow six months from now so that will change we'll see some of that happen but we risk rate I think very conservatively inappropriately okay all right thanks for the help I appreciate it all one moment for our next question
spk13: Our next question comes from Ben Gerlinger with Citi. Your line is open.
spk04: Hey, good morning, everyone.
spk15: Morning, Ben. I just wanted to circle back. I know we've thrown out a lot of guidance and ranges. 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 of 23. 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?
spk33: $20, $21, what? I'm sorry.
spk15: Oh, I'm sorry, for total non-interest income.
spk33: All right. 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. They gave you the number for lease income. Probably the other will trend up a little bit too. I don't have that number right in my head.
spk15: Sure. Yeah, no big deal. Okay, sounds good. I feel like I got most of the guidance right then. So when you guys just think from the kind of lending and philosophical perspective, You said you guys are getting a little bit better rate, especially on even floating rate. Are you potentially introducing credit risk 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 rates, 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?
spk19: I think it has everything to do with the fact that So there is, the cost of money has gone up, spreads are wider for that reason. 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 to the borrowers. Same credit, same risk rating, same names, something that is coming up for a little, you will get wider spreads in this market than say 18 months ago. So it is not about that we're, you know, you know, going down the credit spectrum, it is that the market is in a different place than it was competitively for borrowing than a year ago. That's what is driving wider spreads. But like I said, we're also paying up on the other side. That's why if it is only on the lending side that we're getting wider spreads and the odds was in a happy place like a year and a half ago, our market would be way wider. That's not the case. there's less competition.
spk15: Gosh, okay. That's fair. And then when you think about kind of the holistic approach to expenses, I know there's a cadence kind of with the seasonality. Some years it's more pronounced than others. I'm just curious if you kind of just quarter to quarter, like where might the high point be? Or how do we think about the back half of the year?
spk33: 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 loading of payroll taxes and 401k contributions and HSA seating and all of those things. But beyond that, We don't spend a lot of time trying to figure out which quarter expenses are going to hit the P&L.
spk11: All right, let's start. I appreciate it. Thanks, Chris.
spk03: One moment for our next question. Our next question comes from Steve and Alex Vassalos with J.P.
spk13: Morgan. Your line is open.
spk22: Hi, good morning. This is Alex Lau on for Steve.
spk12: Hey, Alex. How are you?
spk22: 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 CDs running off and the new rates that CDs were coming on at? Thank you.
spk33: 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 that's probably going to reprice up on average by about 50 basis points.
spk19: In terms of new money coming in, and I don't recall exactly where the pricing is right now, but I do know that we backed off on the deposit pricing, on CD pricing, right around Thanksgiving. So we may have done it actually twice, right after Thanksgiving, and then once again in December. So we did lower meaningfully what our promotional rates were for 12-month money, which is sort of our lead product. But I don't have the exact numbers in front of me. But I do remember making those decisions back then. Yeah, high boards, I think, is where we are.
spk22: Got it. Thank you for the color. Moving on to deposits. which business segments or industry 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?
spk08: 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, it's across all segments. It would be I wouldn't have the detail in front of me to give you like a SIC code by SIC 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, it's hundreds of opportunities across all of our business units.
spk15: Very widespread, yeah.
spk22: 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 now? Thanks.
spk08: Yeah, I would say when we track the pipeline through various stages, I would say our pull-through rates, you know, once we get to proposal rate are pretty high. from 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, you know, obviously before a proposal, when something is in dialogue, you know, then it's less. But once we get to proposal stage, our realization rate's pretty high.
spk19: By the way, somebody just texted me on our team. Our 12-month CTO
spk22: 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.
spk33: We're probably not that focused on the efficiency ratio, to be honest. We're more focused on expenses to assets and those types of things. I think our guidance is a mid-single-digit increase in expenses and, I don't know, We don't spend a lot of time thinking about the efficiency ratio, to be honest with you.
spk21: Thank you for taking my question.
spk33: Yeah, not the efficiency ratio. There's just so many components to that. You know, the rate environment is going to affect that. You know, balance sheet transformation is going to affect that. So we'd rather just focus on the components, yeah.
spk13: Got it. Thank you.
spk03: One moment for our next question. Our next question comes from Zachary Westerlin with UBS.
spk13: Your line is open.
spk14: Hi, everyone. It's Zach on for Brody. 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 past three quarters. I was just curious what's driving that and what's the trajectory looking like over the next couple quarters?
spk33: I think what's been driving it is coupon rate increases for the most part. That's probably about done, so the trajectory is probably more likely down than up, particularly if we get rate cuts.
spk14: 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?
spk33: I think next quarter it's going to be up because we're still – We've got the CD repricing. We still haven't had any rate cuts. If the forward curve comes to fruition, it'll start trending down over at least the back half of the year, maybe as soon as the second quarter, depending on what the Fed does.
spk03: Awesome. Appreciate it.
spk13: 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.
spk19: I'll close by saying After a fairly difficult 2023, we're starting the year 2024 on a very positive note. The business has got momentum in all the right places that we worked so hard on, and the economy and the things that we don't control are also favoring us, especially the markets that we're in. So all that gives me a lot of hope for what 2024 will be. It is still a lot of work for us to do, but the team is energized to hit the road and keep building through 2024. Thank you all for joining us. If you have any questions, of course, you can reach me and Leslie directly. We'll talk to you otherwise again in three months. Thank you. Bye.
spk13: Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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