BankUnited, Inc. (NYSE:BKU) Q4 2023 Earnings Call Transcript

BankUnited, Inc. (NYSE:BKU) Q4 2023 Earnings Call Transcript January 26, 2024

BankUnited, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the BankUnited Financial Fourth Quarter and Full Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] 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.

Susan Greenfield: 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 reflect 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 limitation, those relating to the company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by external circumstances outside the company’s 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 statements. These factors should not be concerned as exhaustive.

Information on these factors can be found in the company’s annual report on Form 10-K for the year ended December 31, 2022, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC’s website, www.sec.gov. With that, I’d like to turn the call over to Raj.

Raj Singh: 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’re roughly where, if we do the 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, it relied less on resi and bonds and more C&I and CRE growth. The right side of the balance sheet rely more on core funding, defend DDA and if we did all that, margin would expand and of course, keep expenses in check and keep credit front and center given that we’re in uncertain times.

So, over the last couple of quarters, we kind of lay out for you how we did against those stated goals. I’m happy to announce the fourth quarter of 2023 was a continuation of that story. Deposits grew nicely, $426 million, despite the fact that includes a couple of $100 million of and brokered coming down. So, excluding brokered, our deposits grew $604 million. NIDDA was down for seasonal adjustment, 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 the 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, bonds also came down $100 million, but we had growth in our core segments, C&I and CRE as well.

I was actually — at the beginning of the quarter, I was so 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, by the way, all of this led to margin expansion again. So, margin expanded from 2.56% last quarter 2.60%. And if we keep doing this margin, we’ll keep expanding, and we’ll talk about next year in a little bit — I think just go through the rest of the fourth quarter first. NPAs, on the credit side, NPAs ticked down from 40 basis points to 37 basis points. And if you exclude SBA loans, then 25 basis points. So NPA’s are getting to a place where they’re so low that it will be harder to drive them down, but charge-offs 9 basis points for the year. If we 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 fantastic. And we build reserve again a little bit this quarter — I’m sorry, I still keep calling it reserve — I mean ACL. 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. CET1 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 AOCI net of tax improved by $50 million. So liquidity position stayed strong. So that’s almost become a moving point at this juncture.

So by the way, there are 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 railcars 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, if we had not sold these railcars. So some reprofiting expenses. So happy about that as well. So what are we seeing in the marketplace? The marketplace, there I’d say we’re seeing a soft landing where we‘re seeing 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 mainstream, we’re not seeing a slowdown. We’re not seeing a slowdown in either a loan demand or in margins. We’re not seeing concerns in the credit beyond sort of the day-to-day concern that we always have. So we’re seeing a pretty decent economy, especially in Florida, we’re seeing a pretty strong economy and we need 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, 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 FHLB. And on the lending side, again, on the C&I, CRE front, high single-digits growth. Resi will continue to shrink probably similar to the amount that it shrank this year, give or take, and NIDDA is where the focus will remain. And we’d like NIDDA to get back over 30%, probably. 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 the 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. I mean the first quarter will probably be flattish, give or take 1 or 2 basis points. But after that, margin is a steady increase up into all of this year and into next year. And expenses will be mid-single digits in terms of expense growth. Am I missing anything? Or you can fill in if I miss anything else? And in terms of capital, at least this is the question that will come up to the very first question, I might as well answer it. For the time being, we stay on the sidelines and share repurchases at the February Board meeting, we’ll talk about it again with the board. But 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 of that. With that, let me turn it over to — by the way, I’m recovering from a cold, so I tend to lose my vocal cords after a while. So if I speak less is not because I don’t want to, I love speaking, but just a disclosure if I may have to stop. But Leslie, I’ll turn it over to you. Tom first.

Thomas Cornish : Okay. Thanks, Raj. So first off — I’ll start a little bit on the deposit side. So as Raj mentioned, we were up $426 million for the quarter and non-brokered total deposits were grown by $604 million, excluding the non-brokered 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 the strategy, Resi did decline by $172 million, CRE was up by $77 million for the quarter.

We were happy with that growth. And the C&I 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 C&I 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 municipal finance were 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 CRE for the year. We are, I think, blessed to be in excellent markets and excellent individual geographies. I think we’ve got great talent, groups of people in the right places in the specialties in Florida, the Southeast, our office in Dallas now.

In many parts of the company, we’re just seeing very, very good growth opportunities on the C&I side. We have an extremely robust C&I pipeline in all areas of that corporate banking commercial and the small business unit, we’re seeing just good quality opportunities across the franchise. We do think as we look towards the latter part of the year, we did have CRE growth for the year. I think we’re pretty well positioned from a CRE perspective as we head into the year given that our overall numbers in the CRE portfolio are fairly modest at 23.6% of total risk-based capital — of loan, 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 31, 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 this 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 that — 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 to $108 million in the last two quarters of office exposure, which is significant as a percentage of the overall. Consistent with the prior quarter, the weighted average LTV of the office portfolio was 65%, weighted average debt service coverage ratio was 1.7% at December 31. 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 to December 31. 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 loss 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 gives you some further geographic breakdown of Florida and the New York Tri-State portfolio is by the submarket. 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 in the 12-month lease rollover of 3%. The remainder is in Long Island and 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 CRE office were rated below pass. The 12/31/23. This compares to $90 million at 09/30/23, an increase of $56 million. Most of this increase is a result of tenants vacating space in some buildings, which is putting pressure release temporarily on cash flows and increased insurance costs and interest rate cost to part of it. There is — in most office buildings today, there is a phenomenon even if you re-lease the space, you have a concessionary period of time. In generally, unless it’s a very short period of time, 90 days or less, we 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.

Leslie Lunak: 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 railcars at EFG 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 railcar 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. Net was 2.60% for the quarter compared to 2.56% last quarter.

Earning asset yields went up from 5.52% to 5.70%. The yield on securities increased from 5.48% to 5.73%. There were some coupon resets in there. Some of these things only reset quarterly or annually. So we’re still seeing coupon resets fill through, through the portfolio and some retrospective accounting adjustments. The yield on loans was up from 5.54% to 5.69%. Cost of deposits was up 22 basis points to 2.96%. I’ll mention that, that 22 point — 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 FHLB 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 down a little, maybe up a little. I do want to say, I know there’s a lot of curiosity about this NIM expand — 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 tap 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, it’s 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 2s 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-loan ratio increased from 80 to 82 basis points. The ratio of the ACL to nonperforming 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 reserves for the quarter.

I would say for 2024, we do expect the ACL to continue to build as a percentage of the portfolio 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 3x our historical lifetime through-cycle loss rate. I get that, particularly with respect to office, we’re looking 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 in the railcar 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 award.

So we don’t wish that away. I don’t think there’s anything else of note to talk about the 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 the quarter where the pre-tax signings 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. I’ll turn it over to Raj for any closing remarks you want to make.

Raj Singh: So listen, given where we’re coming from over the last few months, this 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 haven’t felt as 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.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Will Jones with KBW.

Will Jones: I wanted to just start back on the margin guidance. That was really great color you gave just in terms of the margin really benefiting more of the balance sheet composition that go around as opposed to what rates do moving forward. But I guess the question is, the loan side is in process of changing. You guys have really done a lot of heavy lifting on the deposit side. Is the lift really coming from more one or the other? Or is the combination of both. [indiscernible]. Yes, go ahead.

Raj Singh : Yes, I mean, we haven’t — we can’t tell you mathematically like what part of it comes from what side of the other [indiscernible], I mean work needs to be done on both sides. And the comment that Leslie made about the Fed moves in our base numbers, we just use whatever the forward curve was, which was four cuts.

Leslie Lunak : When we put [indiscernible].

Raj Singh : Right. Exactly a month ago, when we put that our budget. But if it was two cuts or three cuts, 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 that feel of the day, they go down 10 cuts or something, something silly like could raise rates four or more times or that will be a different thing. But we didn’t extra cut or 2 or less doesn’t matter the guidance we’re giving. It’s — it has more to do with our ability to keep doing what we’ve done in the last three quarters.

Leslie Lunak: And I will say, well, the expansion that you’ve seen over the last couple of 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 CRE core growth. So I think it’s both going forward. It’s not more one than the other since [indiscernible].

Will Jones: Yes, obviously I think those slides are important. But just in terms of the loan remix you guys are doing rolling off Resi and adding on C&I and CRE, where do you see that trade-off in yields on the portfolio as you kind of roll off some lower-yielding stuff and then add on some of the newer loans?

Leslie Lunak: I mean today, well, the C&I increase that is coming on around 8, give or take, 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. So the big pickup. And we’re also seeing, by the way, even still, and I don’t know how long this will last, but at least for now, the spreads that we’re putting on, on new commercial production are wider than the spreads on commercial loans that are rolling off, even if it’s all floating rate product. 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 SNCs and things that we were doing and doing more bilateral relationship-based business, which also tends to come on at a little bit wider spreads.

Thomas Cornish: 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 CRE, the internal spreads that we measure each group for the entire year finished with better spreads than they did in 2022. So we see incremental margin improvement in each of the lending teams.

Leslie Lunak: So all of that is happening.

Raj Singh: And that’s what the pipeline looks like. At some point, maybe spreads will come back later, but we don’t see that yet.

Will Jones: Yes. Okay. That makes sense. And Raj, I’ll ask because I feel like this is an important moment for you guys. It feels like there’s quite a bit of optimism as to where the margin could go by the end of the year, it feels like this is 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?

Raj Singh: Yes. I know in terms of expenses and operating leverage, I’d rather achieve that through the revenue side than from the expense side. We have done a fairly large expense takeout exercise just before the pandemic. And I’ll tell you that 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 — core markets and the new markets that we have talked to you about over the last couple of years. And operating leverage should really come from expanding margins. And top line growth we’ll come talk to you about growing 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 into 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.

Will Jones: Yes. Okay. That’s great color. Last quick one for me. The gains and losses that you guys see selling the operating lease equipment, is that ordinary course of business for you guys? Or were those really kind of more one-time?

Leslie Lunak: I think we’re trying to pare down on asset classes we don’t think are core to the future of our business. So you’ll probably see some more of that over the course of the next several quarters. I wouldn’t call it one-time, but it’s not something we’ve done forever either. So you should expect to see some more of that. And although it will be lumpy, I don’t expect it to be net-net material over the course of the next year.

Will Jones: So it’s odds equal, I mean, maybe that lease financing business, maybe it’s not. We don’t see much growth there for the foreseeable.

Leslie Lunak: No, it should shrink.

Raj Singh: It’s been shrinking for the last three years. It will continue to shrink. The growth will come from our core footprint business, C&I, CRE, small business. Not from the, what we call BMT, which is the bridge finance business, which is franchise finance and equipment finance, both of those businesses, we have to be run down.

Thomas Cornish: Yes. If you went back 3 years ago, our UPB would have been $2 billion. Today, it’s about $650 million.

Operator: Our next question comes from Timur Braziler with Wells Fargo.

Timur Braziler: Looking at deposit beta assumptions. I’m just wondering what your expectations are here over the next couple of quarters, assuming no rate cuts in the immediate near term, how much additional creep is there on deposit betas over kind of 1Q, 2Q? And then I’m just curious as to what your expectation is for deposit betas on the way down? And if the competitive Florida market might increase that lag effect on betas on the way down or if you think the Florida deposits are going to reprice similar to what you might see elsewhere.

Leslie Lunak: So 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 cost down as rates come down, you have to remember that on the way up, the marginal cost — when rates are coming down, the marginal cost of new business is going to be higher than the market at the total cost of the back book. So on the way up maybe not so much. 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 costs.

So in the aggregate, when you look at it all together, because of that phenomenon, it will appear to be a little slower.

Raj Singh: We do have one more quarter of CD reprice, significant CD repricing, which is the quarter we’re in right now. So 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 very small into the rest of the year. So that’s one element of it. But I think the second element obviously is new money that is coming in compared to where the average book of the back book is today. New money is still coming in pretty high until the Fed cuts, but the existing book repricing should start basically — that phenomenon should be over in about maybe eight more weeks.

Leslie Lunak: Yes, agreed. And then we see this CD repricing phenomenon as one of the reasons we didn’t guide to margin expansion in the first quarter.

Timur Braziler: Got it. That makes sense. And then it’s encouraging to hear that noninterest-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 noninterest-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?

Raj Singh: Yes. I mean our title business has grown very nicely. We’re very happy with it. That’s where most of that seasonality is coming from. It’s basically more with 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 in 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 is closing a mortgage on December 31 or close to it. So we’ve looked back over the last three years very closely as 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 the business is the hottest and these things will level over time. But also within a month and within a quarter, we see that cyclicality and now we have a pretty good handle around it. 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 stuff like that happens. Sometimes they are in flow, sometimes in outflows. But I’d say 75% of that outflow really was a mortgage related, and it happened pretty late in this quarter. Which is why an average cost you see hardly any change, but period imbalances was a significant [indiscernible].

Leslie Lunak: It’s a regular December 31 phenomenon.

Timur Braziler: 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 and what you’re seeing as far as LTV migration on the sales there?

Leslie Lunak: I can say a couple of things about that. Some of that is reappraisal. Some of that is modeled because when we don’t have a new appraisal, we — our models actually take commercial property forecasts at the submarket detailed submarket level and adjust the LTV. So some of that is modeled and some of that is actually reappraisal. Tom, do you have anything to add?

Thomas Cornish: Yes. I would say our — when you say New York City, everybody, obviously, specifically means Manhattan, the number of office loans we have in Manhattan is fairly — it’s a fairly small number. It’s about 12 loans in total. The only maturities that we’ve seen actually paid off. So we were not looking at new appraisals. 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 did not have enough majorities to say that. I would say it’s largely going to point towards valuations being down maybe 20%, something in that kind of range. But it’s very much also a building by building issue depending upon the occupancy and debt service coverage and debt yields and things in that building.

There’s not like all real estate, 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.

Leslie Lunak: And I will say, the LTVs remain very strong, a lot of cushion still there.

Timur Braziler: Great. And then just lastly, New York City multifamily, what portion, if any, is rent regulated and what portion is 2019 or earlier vintage?

Leslie Lunak: We have $121 million worth of New York City rent regulated exposure. It’s insignificant at this point. So…

Thomas Cornish: Yes, 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 — our client base is a traditional generational owned client base. And when a lot of these buildings were acquired at extremely low valuations, the tax basis issue matters a lot in terms of how they support buildings, if there’s any short-term swings in occupancy and debt service coverage ratios and things of that nature.

Operator: Our next question comes from David Rochester with Compass Point.

David Rochester: Just a point of clarification on the expense guide. That’s off of expenses ex the FDIC special? Or is it including that? Excluding it, right?

Leslie Lunak: Yes. Thank you for making that point.

David Rochester: Okay. Sure. I just want to make sure. And on the margin guide, that sounded great in terms of the high 2s. I was hoping you could maybe put some finer parameters around that because high 2s can be a pretty decent range, a pretty big range.

Leslie Lunak: 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.

David Rochester : Got you. Whatever gets you to mid-singles on NII?

Leslie Lunak : Yes.

David Rochester : Yes. Okay. And just on the railcar 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 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?

Leslie Lunak: The income stream is going to come down, but the associated expenses are going to come down as well. And net-net, to bottom line, that’s going to be a positive. I know you don’t — and the 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.

Raj Singh: Yes, I agree with that.

David Rochester : Got you. 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?

Leslie Lunak: The fee income line, it will probably reach to $0.8 million and $0.9 million a quarter.

David Rochester : 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. 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 to tangible here why you still have it?

Raj Singh: Maybe I just speak too conservative. I kind of still feel there’s more time that’s needed to in the past. There’s still a possibility of a recession or a slowdown. I think that’s just — I’d rather deploy that capital, honestly, into loan 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, as an example, which we’ve been shrinking at some point this year, it will 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 in the very short term, I think we’ll stay on the sideline. But I don’t want to speak for the Board to mention the Board’s decision but we do have this as a discussion point of 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 we can change. We do actively discuss it every board meeting.

Thomas Cornish: I wanted to come back on one point on your railcar question as it related to the comment about underwater. It’s not so much that we’re underwater from a residual to NLV 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 continue to move out of these sometimes relatively small games, sometimes relatively small losses, it fits the long-term strategy of the company.

Operator: Our next question comes from John Arfstrom with RBC.

John Arfstrom: I think Dave had all my questions just lined right up, but I do have a few more. How much more is it 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 — I guess, a little under $1 billion? And how long does this continue to go?

Raj Singh: I think you should expect this year, $700 million, $800 million more this year. And we’re not giving guidance for next year, but I think that trend is sort of — will kind of continue because that — I still think we’re way over allocated to resi despite it being a very safe asset. It just doesn’t have the yield on the spread. So yes, I think we did something — I forget the exact number this year, but it will be a similar number about between ’23. It will be a similar number in ’24 in terms of production.

John Arfstrom: Have you ever shared an optimal percentage for resi?

Raj Singh: I’d say 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 does it.

John Arfstrom : Okay. Okay. Good. You referenced the 30% is where you’d like noninterest-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?

Unidentified Company Representative: [indiscernible]

Raj Singh: We were over 30% a couple of years back. Obviously, that was a very different monetary environment that we’re in today. But at the beginning of the year, we often come up with sort of a slow business of the company to sort of rally behind. We wanted the company to rally behind. And I point with the idea of putting that up and saying that’s what we’re going to do. So this is not magic to the 30%. It’s just that if we were at 32%, 33%, and I know certainly commercial length are even higher than that, we should strive for a three handle. So — but there isn’t a well thought out sort of logic to this of why you get there. What we will say is the pipeline that we now track closely than anything outside of the company with the treasury pipeline, account by account, which we spend hours every week focusing on is pretty decent [indiscernible] robust.

And that gives me the confidence to say that I think that is attainable goal. It may not happen in the next two, three quarters, but it will certainly something which we can achieve in the next couple of years.

Thomas Cornish: I would add to that since I’m generally in the middle of the battle every day that it kind of comes down to three things. Number one, you have to have the right talent in the right places, so we 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 tend to drive significant deposit levels. And the third is just back to something Raj alluded to is intense focus on it.

Raj Singh: You do have to pick those spots based on where the money is and where the industry goes then go in and actually look at where the pain points are in those industries and those spots as you say. And it generally takes a multiyear effort to solve those pain points through combinational technology and process. And then you hit the market and you were able to gather on next share. That’s been the formula for success. It doesn’t happen in the 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 of our size are just not focused on, and we do.

Thomas Cornish: If you’re a football fan, it’s 4 yards in the cloud of dots every day.

John Arfstrom: Yes. Okay. I thought it was 3 yards, but I’ll give you 4, Tom.

Leslie Lunak: [indiscernible].

John Arfstrom: Yes. Okay, you’re better than that. The dolphins they run — they throw, they don’t run is what I should say. Yes. Just one more. On Slide 6, 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 — 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 build do you expect for this going forward as the mix changes?

Leslie Lunak: Yes. What you see there this quarter corresponds to the to the increase that you saw in criticized classified outlook that — and one more that we put a specific reserve on it’s not really material enough to go into details about. It’s hard to say where that goes in the future, to be honest with you. I think credit is normalizing, NPL levels are very low. Net charge-off rates are very low, and I think across the industry, we’re seeing some normalization of credit. And I think we’ll continue to see that. There’s nothing for us as we’re not losing sleep over credit, but you will continue to see some normalization of credit. So there’ll probably be a little bit of that.

Raj. Singh: But it also includes the shift from resi [indiscernible].

Leslie Lunak: [indiscernible].

John Arfstrom: In general.

Raj Singh: As the C&I build, CRE build and Resi goes up, you should expect the 82 basis points [indiscernible]

Leslie Lunak: It will still go up.

Raj Singh: Because we just — against C&I, we have higher.

Leslie Lunak: Yes, 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 will be expected. I mean you can see right now we’ve got a 1.53% reserve on C&I and 0.09% reserve on residential. So.

Thomas Cornish : I 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 will be six months from now. And if you have a building that loses a tenant, and you have a new lease in place from an investment-grade company, but the cash flow does not start to kick in. For six months, we created 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 conservative and appropriately.

Operator: Our next question comes from Ben Gerlinger with Citi.

Ben Gerlinger: 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 million, give or take on the full year ’23. As I think you said lease finance should be around $9 million a quarter roughly.

Leslie Lunak: [indiscernible]

Ben Gerlinger: Okay. So rough is it fair to call it around 20%, 21-ish on a normalized basis?

Leslie Lunak: 20, 21, what, I’m sorry?

Ben Gerlinger: Million — I’m sorry, for total non-interest income.

Leslie Lunak: 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 that total.

Ben Gerlinger: Sure. Okay, sounds good. I felt like I got most of the guidance right. 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 — are you potentially introducing credit risk? Or is it just other lenders backing out that gives you a better yield? And if they come back in, the odd probably will start with raise, which is kind of annoying from a competitive perspective, but like is that embedded in some of your guidance that rates probably will come down if the economy is better than expected?

Raj Singh: I think it has everything to do with the fact that the Fed is shrinking the amount of money in the system. 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 we’re just kind of the conduit to pass that on to the borrowers. The same credit, same risk rating, same names something that is coming up for a little spread in this market that’s 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 or for borrowing than a year ago. That’s what is driving wider spreads. But like I said, we’re also paying up on deposit side. That’s why if it’s only on the lending side that we’re getting wider spreads in deposits was in the happy place like 1.5 years ago, my will be way wider.

That’s not the case. So now it’s not about price selection. It’s all about the market dynamics. There’s less competition.

Ben Gerlinger: Got you. Okay. That’s fair. And then when you think about kind of a holistic approach to expenses. I know there’s some — there’s a cadence kind of with the seasonality of some are just more pronounced than others. I was just curious if you can just quarter-to-quarter, like where might the high point be? Or how should we think about the back half of the year?

Leslie Lunak: 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 401(k) contributions and HAS 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.

Operator: Our next question comes from Steven Alexopoulos with J.P. Morgan.

Alex Lau: This is Alex Lau on for Steve. 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?

Leslie Lunak: 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 $1 billion coming due in the first quarter that’s probably going to reprice up on average by about 50 basis points.

Raj Singh: 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 right after Thanksgiving and then once again in December. So we did get — 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 internally. But I do remember making those decisions [indiscernible]. Yes, high 4s I think, is where we are.

Alex Lau: Got it. Moving on to deposits. Which business segments or industry did you see the growth of the $600 million in non-brokered deposits in the quarter? And what level of rate are you paying on these new deposits? And how much of this is new DDA?

Thomas Cornish: Yes. I would say if you look at the deposit growth, it was pretty much across every business line. So it’s across all segments. It would be — I wouldn’t have the detail in front of me to give you like a code-by-code breakdown of what industry segments it was, but it was pretty broadly based across kind of all lines of business, which is what we’re seeing from what’s in the pipeline when we look at it. I mean, it’s hundreds of opportunities across all of our business units.

Alex Lau: Great. And can you also comment on your ability to convert those treasury deposit pipelines in the fourth quarter? And has this ability to convert and improving with customers were willing to move balances now that March Madness close to a year ago now?

Thomas Cornish: Yes. I would say when we track the pipeline through various stages, I would say, our pull-through rates 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 obviously, before proposal, when something is in dialogue, then it’s less. But once we get the proposal stage, our realization rate is pretty high.

Raj Singh: By the way, somebody just texted me on our team, our 12-month CD price [indiscernible] is 4.5%, and we have a 9-month promo at 5%. That’s been the rate for the last few weeks.

Alex Lau: 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?

Leslie Lunak: 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 we don’t spend a lot of time thinking about the efficiency ratio to be honest with you. Yes, not the efficiency ratio. There is certain components to that. The rate environment is going to affect that. The balance sheet transformation is going to affect that, and we’d rather just focus on the components.

Operator: Our next question comes from Zach Westerlind with UBS.

Zach Westerlind: It’s Zack on for Brody. Most of my questions have been answered, so I just had a couple of quick ones related to the margin. The securities yield. You guys have had some nice increases in that over the next — over the past three quarters. I was just curious what’s driving that? And what’s the trajectory looking like over the next couple of quarters?

Leslie Lunak: 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 us, particularly if we get rate cuts.

Zach Westerlind: Got it. And then on the deposit cost, the 420 spot rate, how do you expect that to trend over the first half of the year?

Leslie Lunak: I think next quarter is going to be up because we’re still — we’ve got the CD repricing, and we still haven’t had any rate cuts. If the forward curve comes to fruition, it will start trending down over at least the back half of the year or maybe as soon as the second quarter depending on what the Fed does.

Operator: 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.

Raj Singh: I’ll close by saying, after a fairly typical 2023, we’re starting the year 2024 at a very positive note. The business is — it’s 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 in the markets that we’re in. So all that gives me a lot of hope for what 2024 will be. There is still a lot of work for us to do and — 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 or Leslie directly. We’ll talk to you otherwise get in three months. Thank you. Bye.

Operator: Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.