Daryl Bible: Yes. So on the CRE front, I think we saw really good performance this quarter. One quarter doesn’t make a trend yet, but it was a positive quarter. We had our criticized numbers come down, still had health care and office go up a little bit. But overall, I think we’re seeing that stabilize. We did — I talked about it in the prepared remarks, we did go through that construction review. We got through 80% of the construction review. We only had $200 million change in criticized. We have a little bit to go, and we’ll have very nominal increase there. So getting through that construction book was huge. It was, I think, $8.6 billion in size we went through. So that was a really good review. We’ll continue to monitor it.
Obviously, office and healthcare are more the troubled sectors and those where we will work with over time. But our teams are working with our customers each and every day. We’re trying to get out in front of working with them to make sure we can help them through any stress that we have and I think we feel pretty good just going forward with that. So, definitely not out of the woods with CRE, but I think we’re feeling that we’re having some positive trends. As far as C&I goes, to be honest with you, we had two really credits. One was a non-auto dealer and this non-auto dealer was stressed a little bit with higher interest rates. It was a marine dealers such that a lot of activity in the boats was coming down and didn’t have as much demand there.
And we just basically had to put a specific reserve on that and take a charge-off in that sector. And the other one that came through was a healthcare credit and those were the two largest C&I credits that came through that really impacted the numbers. So it wasn’t for those, you probably wouldn’t have noticed anything from a charge-off perspective or provision.
John Pancari: Thanks, Daryl. If I can ask just one more on the credit front tied to that. Your criticized loans do trend above your peer levels. But is there a degree of conservativeness in there, in terms of I guess, how you treat your recourse agreement as part of CRE and elsewhere? Is there something in the way you’re doing your internal risk ratings that may include your criticized levels? We’re getting a fair amount of incomings regarding that.
Daryl Bible: Yes. So we have had a long history of running with a higher level of criticized. We do that intentionally because we want to work with our clients, because if we work with our clients and get them through these stress times, they’re very loyal to our company. It’s the right thing for our communities and all of that. So that’s first and foremost. I would say we just tend to be a conservative company. I’m on the financial side, so I’m conservative with capital and liquidity. You have Mike Todaro and Bob, our Chief Credit Officer, they’re conservative on the credit side. So it’s just how we run and operate the bank. We’re going to do the right things and try to work with our customers to get through issues. When we — customers are not supportive in getting through issues, that’s when we might try to sell some credits, but that’s usually a few and far between.
But our history is to work with them. We find that working with our clients over the long term produces less losses, better capital preservation and better for both shareholders as well as us as a company and all that. So that’s how we’re going to continue to operate.
John Pancari: Okay, thanks, Daryl.
Daryl Bible: Yes.
Operator: Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.
Ebrahim Poonawala: Hey, good morning, Daryl.
Daryl Bible: Good morning.
Ebrahim Poonawala: So, I guess, a question on commercial real estate. You’ve done a lot of work over the last year, deep-diving on the portfolio. If we think about, I think, the stress in the market and it’s been the wet blanket on your stock is around what higher rates could mean on commercial real estate risk. Give a sense of when you look at sensitivity, be it loan-to-value discounted sort of debt service coverage ratios. If we don’t get any rate cuts for the next two years, does that — and the economy — and that’s because the economy is doing fairly well, does that lead to worse outcomes just because rates are higher? Like give us a sense of no rate cuts, elevated yield curve, what’s the sensitivity to that portfolio is in terms of credit losses?
Daryl Bible: Yes. If you don’t mind, Ebrahim, I’m going to pivot a little bit, because we actually ran a scenario last quarter and stressed our CRE portfolio up 100 basis points of what impact that might have for us. So I mean, if you look at it from that perspective, it really depends on what level of rates are going higher. So let’s just assume right now, it’s the Fed rates, the short-term rates. If you look at our CRE portfolio, the vast majority of the CRE portfolio is fixed rate, either a fixed rate loan or they synthetically have swaps that have it fixed. So only 29% flows. If you look at going up 100 basis points, we see really very minimal impact on the portfolio, maybe at most approximately $500 million might go into criticized if they fall below the 1.2 debt service coverage ratio.
That’s what we had from that. If you look at the C&I book, C&I book, $58 billion is all floating. Now the vast majority of the C&I book has debt service coverage ratios well over 2% and very strong. But if you look at a subset of the leverage book that we have in there, that’s closer to $5 billion. We call them leveraged, but when we put them on, they were leveraged, about half of those aren’t even levered anymore because of their performance. So you’re really only looking at about half of that. It is really pure levered loans. And when you look at those levered loans coming through and stress them 100 basis points, it’s a minimal impact for us, a couple of hundred million dollars from a criticized. Now, if you go to the longer end of the curve, and in the longer end of the curve, let’s say, five or 10 year goes up 100 basis points, that really impacts more our construction book, because you need to have takeouts there.
