BankUnited Inc (BKU) 2023 Q4 法說會逐字稿

Good day, and thank you for standing by, and welcome to the BankUnited Financial Fourth Quarter and Fiscal Year 2023 earnings call.

(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.

Thank you, Kevin, and good morning, and thank you for joining us today on the call this morning are Bob Singer, Chairman, President and CEO, Wesley Lubeck, 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 are on the Company's current plans, estimates and expectations, 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 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 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 31st, 2022, and any subsequent quarterly report on Form 10 Q for a current report on Form eight K, which are available at the SEC's website at www.SEC.com. With that, I'd like to turn the call over to Bob.

Thank you, Susan.

Good morning, everyone, and thank you for joining us for the earnings call.

But 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 roughly where we would summarize them by saying improve the balance sheet to improve the P&L and the balance sheet needs on the left side of the balance sheet rely less on resi bonds and more C&I and CRE growth.

The right side of the balance sheet rely more on core funding, defend EBITDA and EBIT.

All that margin would expand and of course, keep expenses in check and keep credit up front and center, given that we are in uncertain times.

So over the last couple of quarters, we kind of laid 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 hundred billion dollars of brokered coming down.

So excluding brokered, our deposits grew 604 million and EBITDA was down versus a seasonal adjustment.

It literally happened in the last two, three days of the quarter, average CVA were actually down only 28 million, but period end were down more and on wholesale funding came down as I did last quarter.

Fhlb brokered, everything was down on the left side of the balance sheet, just like last quarter, resi loans came down 172 million.

Our bonds also came down 100, but we had growth in our core segments, C&I and CRE as well.

I was actually at the beginning of the quarter ever since it seems like it might be a flat quarter for CRE, but it also improves the total between C&I and CRE grew 476 million on credit.

By the way, all of this led to margin expansion again.

So margin expanded from 56 last quarter to 60.

Have to keep doing this margin will keep expanding.

And we'll talk about next year in a little bit of a just go through the rest of the fourth quarter.

First, our MPAs, the credit side with some NPAs ticked down from 40 basis points to 37 basis points.

And if you exclude SBA loans than the tax rate, 25 basis points.

Same peers are getting to a place where they're so low that it will be harder to drive that down charge-offs at nine basis points for the year.

If you compare that to last year, I think we were at 22 basis points of that number.

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 have the economy of reserve.

I mean, ACL going up.

Yes, I think the 82 basis points was 80 basis points last quarter.

Criticized assets did increase this quarter, as you would expect this time in the cycle.

But overall in credit with charge-offs being where they are NPAs being where they are at our reserve or ACL being where it is.

I'm sleeping very well at night.

Our capital is robust.

Asset one is now 1104 and TCTA. also is now at 7%.

Unrealized losses in the securities portfolio grew by over 100 million bucks and AOCI net of tax improved by 50 million.

So Adam, our liquidity position stayed strong.

So that's almost become a moot point at this juncture.

So only that by the way, there are a couple of things sort of notable items in the P&L, which we highlighted in the earnings release, the FDIC assessment, which you guys all know 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 to be 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 retrofitting expenses.

So happy about that as well.

So what are we seeing in the marketplace the marketplace, 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 would 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 a slowdown in loan demand or in margins.

We're not seeing no concerns in the credit beyond sort of the day-to-day concerns that we always have.

So we're seeing a pretty decent economy, especially 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 the economy and the rate environment.

It feels like this year, the strategy is going to say, by the way, is 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 finish 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 brokered.

So brokered would actually take down on your take on FHLB.

And on the lending side, again, on the C&I CRE front, high single digits growth, Randy will continue to shrink, probably similar to the amount that it shrank this we are going to give or take and IDIADA is where the focus will remain as we'd like in IDIADA to get back over 30%.

Probably it's hard to say when that will happen, but we're certainly are gearing the whole company up to two for that to get back over 30% over time.

That may have happened in the year.

It may happen a couple of years.

So that's still be that could be of the most important maybe wouldn't change.

Our margins should continue to improve.

I mean, the first quarter will probably be flattish, give or take one or two basis points.

But after that, a margin steady increase up into all of this year and into next year.

And expenses will be mid-single digits in terms of expense growth.

Have I missed anything or you can fill that need financing, anything else in terms of capital, at least the other questions that'll come up to the very first questions that might have an answer it so that for the time being, we stay on the sidelines with share repurchases, share repurchases at the February Board meeting, we'll talk about it again with the Board, I think in the short term, but that's going to be our stand in the medium term.

It will probably change, 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.

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 that for a while.

If I if I speak let us not because I don't want to I love speaking, but the disclosure on food I may have to stop, Leslie, I'll turn it over.

You got to make profit top first.

Okay.

Thanks, Raj.

So personnel out there I've got.

Yes, I got a little confused that you have.

I'll start a little bit on the deposit side.

So as Raj mentioned, we were up $426 million for the quarter.

In non-brokered, the total deposits have 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 our operating account business and NIDDA. business in line with Raj's comments about continuing to emphasize that business.

That pipeline has remained strong on 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 Roger outlined, consistent with strategy resident declined by 172 million.

Cree was up by $77 million for the quarter where we were happy with that growth for the C&I growth across all segments lines on 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 down 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 in the 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 in excellent individual geographies I think we've got great talent groups of people in the right places in the specialties and Florida, the Southeast of 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 small business area.

We're seeing good quality opportunities, cross franchise fleet.

We do think as we look towards the latter part of the year, we did have CRI growth for the year.

I think we're pretty well positioned from a CRI perspective.

You know, as we head into the year, given that, you know, our overall numbers in the free portfolio are fairly modest at 23.6% of total risk-based capital of long periods of loans on total loans and 13% of the 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 some opportunities with clients that have capital at play.

And I think compared to other banks that have much larger CRI 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 through the second half of the year for the right market performs the way it's expected to perform.

So with that let me spend a few minutes on the credit portfolio.

You also have greater detail in Slides 12 through 14 of the supplemental deck where we've provided additional disclosure.

So the credit portfolio does remain modest.

At 23.6% of total loans created total risk-based capital is 169%, well below the regulatory guidance threshold at December 31st, the weighted average LTV of the credit portfolio was 56% and the weighted average debt service coverage ratio was 1.8, up about 16% of the credit portfolio matures in the next 12 months and about 8% matures in the next 12 months and is 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.

A 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 was 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 31st, we've provided some of the breakdown of those numbers by geography on slide 12, substantially all of the portfolio was performing in 92% was pass rated at December 31st, that overall, the portfolio continues to perform well is characterized by strong sponsors who are supporting underlying property 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 four portfolios is suburban.

There's some charts on slide 14, the producing for the geographic breakdown of Florida and the New York tri-state portfolios 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 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 of 42% in Manhattan, which totals approximately $180 million.

Our Manhattan office portfolio has 96% occupancy in 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% of 146 million of Cree office were rated below past at 1231 23.

This compares to 90 million at nine 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 cost.

A 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 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 from time to time.

And so net income from the total was 20.8 million or $0.27 per share, obviously impacted by the FDIC special assessment.

That was 35.4 million pretax.

We also sold or in some cases entered into agreements to sell some railcars at BSG 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 that 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 that to net out to anything material in the aggregate in terms of gains and losses, although it could be lumpy network to 60 for the quarter compared to 56 last quarter.

Earning asset yields went up from 52 to five 70.

The yield on securities increased from five 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 reset silver through the portfolio and some retrospective accounting adjustments.

The yield on loans was up from five 54 to 5 69.

Cost of deposits was at 22 basis points to 96.

I'll mention that that 20 to 22 basis point increase this quarter compares to a 28 basis point increase last quarter.

And for the last several quarters now, we've seen that rate of increase slow quarter over quarter, which is a good sign.

An 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 and a little bit more about 2024 guidance.

Following up on what Raj said, we do expect the need to expand overall in 2024, although Q1 will likely be flattish, maybe down a little, maybe up a little time.

I do want to say I know there's a lot of curiosity about this need to expand the forecasted net expansion as a result of what we're doing on the balance sheet.

It's a result of the transformation that will work that we're doing on both the left side and the right side of the balance sheet, it actually doesn't have much at all to do with whether there's two cuts, three cuts, six cuts that we announced that that's not going to change that picture.

The static balance sheet is pretty neutral.

It's very, very modestly asset sensitive, but hopefully the balance sheet visibility static, and that's what's going to drive and in his balance sheet composition, not now with the Fed does, our forecast does have four cuts and then one each quarter, but that's not really the driver.

And we've seen in 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 demand.

Even though we expect the total balance sheet to remain relatively flat backwards.

Hi, there.

Provision this quarter was $19 million and the ACL to loans ratio increased from 80 to 82 basis points.

The ratio of ACL to nonperforming loans increased to one from one 43.

And the main drivers of this quarter's provision included commercial production and the remixing in the portfolio and some increase in criticized classified assets.

Here's a waterfall chart in the deck that shows you all the things that drove the change in the reserve for the quarter.

I would say for 2024, we do expect the ACL to continue to build as a percentage of the portfolio as the portfolio composition shifts more towards commercial versus residential loans and commercial loans, obviously generally carry higher reserves.

The other thing I would make a point of saying is our CRI reserve is almost three times our historical lifetime through-cycle loss rate and 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.

Noninterest income and expense.

We already talked about the FDIC special assessment in the railcar sale, the increase in comp compared to the current 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 noninterest income and expense.

Cdcr was low this quarter mainly because of state ARTT. true ups and the outsized impact they have on the ETR in the quarter where the pretax earnings numbers 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, and I'll turn it over to Raj for any closing remarks you want to make.

Given where we're coming from over the last few months.

This is a pretty good place.

The progress has been 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 this optimistic in quite some time.

So that's a good place to start the year.

I'll open this up for Q&A and a simple kind of we do.

And just on that, operator, we're ready for Q&A.

Thank you.

Will Jones, KBW.

Hey.

Great.

Good morning, guys.

Good morning, Will.

I wanted to just start back on the margin guidance listed out.

That was really great color you gave on just in terms of the margin really benefiting more of the balance sheet composition this go around it as opposed to what rates do going forward.

But I guess the question is the loan side is in process of change and 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 a combination of both on the traditional footprint?

Yes.

Yes.

I mean, we haven't we can't tell you mathematically like what part of it comes from one side or the other.

But both the work needs to do on 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 at risk for clients when they could cancel them right, where they are exactly a month ago when it was better than our budget up.

But if it has to catch a precursor for calcified plaque.

And it doesn't really matter.

That's how the balance sheet structure right now is that something really out of left field and they have a group called out hand cuts or something ago, something silly like, oh, I could raise rates.

There are four more times than that.

It will be a different thing.

But within the extra cut or two or less.

It doesn't really matter because I'm getting it's a it has more to do with our ability to keep doing what we've done the last three quarters.

I will say will the expansion that you've seen over the last couple of quarters has been more related to funding.

But going forward, we're really starting to get some good traction on the C&I increase core growth.

So I think it's close to, if not more one than the other, it's airlines here.

Yes.

And I actually think both sides are important, but just in terms of the loan remix you guys are doing, you know, rolling off ready and adding on C&I and CRE, but where do you see that paid 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 any today?

Well, the C&I increase that dependent on around eight irritate down, maybe a little more interesting stuff that's rolling off.

I mean, imagine portfolio has an average yield of three, so a 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, and the spreads that we're putting on new commercial production are wider than the spreads on commercial loans that are rolling off, even if it's all floating rate 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 this mix and things that we were doing and doing more bilateral relationship based business.

That also tends to come on a little bit wider spreads.

If you look for example, but look this year where we finished out, if you looked at February core lending group, corporate commercial, small business and CRI, 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 to our behalf.

And that's what the pipeline looks like.

At some point.

Maybe spreads will come back higher, but we don't see that yet.

Yes.

Okay.

Makes sense.

And Raj, I'll ask because I feel like this is new and it's an important moment for you guys.

It feels like there's quite a bit of optimism as to what where the margin could go.

But by the end of the year, it feels like this is really one of the first years were in a while that you guys are kind of maybe pulling back a little bit on expense growth.

Is this the year?

Where will we start to see some operating leverage really play out, especially in the back half of 2024?

Yes.

No, I know in terms of expenses and operating leverage, I'd rather achieve that through on the revenue side.

Then 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 of our core markets and the nuances that we have.

I'll talk to you about over the last couple of years and the operating leverage should really come from expanding margins at some point will come talk to you about going full balance sheet as well.

It may not be in the next two, three quarters because it's silly for a conforming balance sheet historic.

But you know, Leslie is kicking me under the table because I'm not going to talk about 2025.

But if I was to take a wild guess I would say that 20, 25 and beyond.

I think we'll go back to the normal world of growing the balance sheet rather than just transforming here.

Yes.

Okay, great color.

Last quick one for me.

The gains and losses that you guys see selling operating lease equipment, is that ordinary course of business for you guys or were those really kind of more onetime?

I think we are we're trying to pare down on asset classes that we don't think are core to the future of our business.

So you'll probably see some more of that over the course of the next several quarters.

And 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, although it will be lumpy, I don't expect it to be net-net material over the course of the next year.

So sort of all else equal, I mean maybe maybe that lease financing business, maybe it's not we don't see what's growth rate for the foreseeable now if you reflected shrink sequentially from the last three years?

It will continue to strengthen the growth to come from.

They've got a core footprint business, C&I, CRE, small business, not from the what we call VSG, which is a bridge finance business, which is franchise finance and equipment finance.

All those businesses have been run down.

If you went back three years ago, our UPB would have been 2 billion today.

It's about $650 million.

So that now all crops, yes.

Okay, that's helpful.

Thanks, guys.

Timur Braziler, Wells Fargo.

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.

So I'll address that in a high level.

I mean, there's a lot of very granular modeling that goes on there.

And I'm not going to trying to dive into all the details of it, but the beta through the cycle thus far has been about 54.

And we're still modeling high 50s in the aggregate by the time repricing up stops.

And as far as on the way down, while I think we'll be quite proactive in bringing deposit costs down as rates come down.

You have to remember that on the way up the marginal cost, again, when rates are coming down, the marginal cost of new business is going to be higher than the market as a total cost of the back-book.

So on the way out, maybe not so much on the back of, 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 altogether, because of that phenomenon, it'll appear to be a little slower.

We do have one more quarter of seeing the private segment, the gasoline repricing, which is the quarter we're in right now.

So after that, when we look at our CD maturity, is it sort of it just drops off pretty significantly after March of last quarter, Q4 was pretty big and this quarter is also big.

And then second quarter is really, really small in scale and because the rest of the year.

So that's one element of it.

But I think about the second element obviously is new money that is coming in compared to where the average book back book is today.

New money is still coming in pretty high until the Fed cuts, but the existing book repricing should start to basically that's that that phenomena should be over and above the A4.

We agree.

And then retaining repricing phenomenon is one of the reasons we didn't guide to margin expansion in the first Warner.

Got it.

That makes sense.

And then it's encouraging to hear that noninterest-bearing migration in 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?

Yes.

I mean, our title business is has grown very nicely, and we're very happy with it.

So that's where most of that seasonality is coming from.

It's basically mortgage origination, mortgage banking related deposit and they do they follow a pretty routine cycle.

They're always weaker in the middle of the month, middle of the quarter, although stronger month and quarter end with one exception, which is year-end year end, that business they'll kind of shuts down.

It is very little activity.

Nobody is closing a mortgage on December 31st or close to it.

So we've looked back over the last three years, very closely at the data.

We see the same trend last December and December before.

It's a little more pronounced as the business has gotten bigger.

So that will start building up the 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 don't we have a pretty good handle around that.

So most of that happened in that business.

There was the there was a little bit of outflow from some accounts.

But I would call that sort of ad hoc, if something like that happens, sometimes the inflows and outflows.

But I'd say 75% of that outflow really was it mortgage-related and it happened pretty late in the quarter, which is why on average now the ACRP any change.

But period-end balances was because of the significant of a regular December 31st phenomenon.

Got it.

And then just a couple on CRE related questions.

It looks like office LTV 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 and what you're seeing as far as LTE migration.

So on the tails there are a couple of things about that?

Some of that reappraisal, some of that is modeled because we really don't have a new appraisal.

We in our models actually paid commercial property forecast at the submarket, detailed submarket level and adjust the LTV.

So some of that this model than some of that is actually reappraisals, Tom, given that your.

I would say you know or New York City, if everybody obviously specific removed Manhattan for the number of office loans we have in Manhattan is fairly fairly small number.

It's about 12 loans in total the only the only maturities that we've seen actually pay 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 maturities to say that I would say is largely going to point towards valuations being down, maybe 20%, something in that kind of range credits.

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 and 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.

I would say the LTVs remain very strong a lot of cushion well there.

Great.

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

They have 121 million worth of New York City rent regulated, others are insignificant.

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, you know, our client base is a traditional generational owned on 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.

Great.

Thank you for that color.

David Rochester, Compass Point.

Hey, good morning, guys as well.

Just a point of clarification on the expense guide that's off of expenses ex the FDIC special or is that including that?

Yeah.

Excluding that, right?

Yes.

Thank you for making that point.

Okay.

Short, I just want to make sure on the margin guide, that sounded great in terms of the high twos Was hoping you could maybe put some finer parameters around that because high twos can be a pretty decent range, pretty big range.

I know and I'm a little bit hesitant thinking that because there are just so many factors that could 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.

Yes, whatever gets you to mid singles on NI?

Yes.

Yes.

Okay.

And just on the railcar sales it sounds 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 will the sales mean for that income stream going forward?

What's a good run rate on that going into Q1?

The income stream is going to come down because the associated expenses are going to come down as well and net debt to bottom line, that's going to be a positive I know you don't.

And that depreciation of operating lease equipment will come down as well.

And there are other expenses that you don't see because they're not broken out in the P&L of running that business that are kind of come down so well, that fee income line will come down.

Net-net, this will be a boost to the bottom line fill orders up.

Yeah.

I agree with that.

In terms of the magnitude you guys are expecting there.

I mean, should that get cut in half over the next year, how you're thinking about the trend down?

The fee income line will $0.89 million a quarter.

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 in the C&I and CRE outlook.

Is positive.

You're talking about a soft landing and credit trends are contained.

Why not take advantage of the discount to tangible here?

Why you still have it?

I mean, we are obviously too conservative, but I kind of still feel there is more time that's needed to get passed.

There's still a possibility of a recession or a slowdown.

I think this just I'd rather deploy that capital, obviously that into the loan growth, I know we're not talking about total growth this year as much.

But into next year, we are thinking about them in the bond portfolio as an example, which we've been shrinking at some point this year and will start shrinking.

So overall, we're also gearing for balance sheet growth in the out years and and also looking at, yes, there's still uncertainty in the system.

So put that all together in the very short term, I think we'll stay on the sidelines, but I don't want to speak for the Board eventually 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 check.

We do actively discuss it at every Board meeting.

I wanted to come back on one point on your railcar question as it related to the comment about underwater, it's not so much that were underwater from a residual to NOV kind of analysis perspective.

It states 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, as you know, sometimes relatively small gains, sometimes relatively small losses.

It fits the long-term strategy of the Company.

Great.

Sounds good.

Thanks, guys.

Jon Atkin, RBC.

Hey, good morning.

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 on the residential runoff?

I mean, Raj, you alluded to it, it might be similar.

So question one is, do we assume down another five, I guess, a little under $1 billion?

And how long does this continue to go.

I think you should expect this year, $70 million more this year, and we're not giving guidance for next year.

But I think that trend is sort of fluid kind of continue because I still think we're way over allocated to residents despite it being a very safe asset.

It just doesn't have the yield and the spread.

So yes, I think we did something I forget the exact number this year, but it will be a similar number in 23.

It will be similar number in 2014 in terms of term.

Have you ever shared an optimal percentage for resi?

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 ago that Washington.

Okay, good.

And 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 to how do you do that?

What is the strategy to do that?

Well, client about how much time you have?

No magic wand.

Regarding I we were over 30%.

So a couple of years back.

Obviously, that was very different monitor environment that we're in today.

But yes, at the beginning of the year, we often come up with sort of a slow season for the Company to sort of rally behind when the Company rally behind and our point with the idea of yield putting that up, I'd say that's what we're going to do.

So there's no magic to 30%.

It's just that if we were at 32, 33% and I know certainly commercial lines that are even higher than that.

We should strive for a three handle.

So but there is a sort of a well thought out sort of logic to this is why you get there.

What we will say is the pipeline that we now track poultry than anything else from the company with the Treasury pipeline account by account of which we spent hours every week focusing on is pretty decent, very 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 the next couple of years.

I would I would add to that since I'm generally in the middle of the battle every day, Pat, you know, it kind of comes down to three things.

Number one, you have to have the right talent in the right places who are driving value at the client level and can make people change from X bank to our bank.

You have to be focused on market segments that are predominantly more deposit rich than others.

And there are some industries that drive significant deposits and some that don't.

So we have over the last few years altered 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 Roger alluded to is intense focus on it.

You have to because spots based on the LD where the money is, where the industry doesn't go in and actually look at where the pain points are in those industries and also sponsorships.

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 wanted to share that in 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 itself.

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 our focus on.

And we do if you're a football fan, that's four yards and a cloud of data every day.

Okay.

I thought it was three yards, but I'll give you four, Tom, that you allocate your better than that, the Dolphins that they run them this throw they don't run as well, 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 forecasts had a huge impact on the reserves for the year, but you actually have a little better economic forecasts, 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 then how material of a Bill do you expect for this going forward?

As the mix changes in any quarter corresponds to the increase in criticized classified and one specific reserve on this material 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 left for us is we're not losing sleep over credit that you will continue to see some normalization of credit to them probably do a little bit of both.

But it also includes the shift from revenue.

Management and that calls for us to comment would be I think the general 0.5, yes, yes, yes.

As the C & I built CR-V builds and revenue as of you should expect the 82 basis points all else being equal, it will go up because we just against C&I, 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 composition has shifted.

Is that going 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.

I will 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 now, but we think there will be six months from now, if you have a view, if you have a building owner 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 graded 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 and appropriately.

Okay.

All right.

Thanks for the help.

I appreciate it.

Ben Gerlinger, Citi.

I just wanted to circle back and now it's thrown out a lot of guidance in ranges.

I just wanted to confirm that everything correct.

So kind of mid single digits on an eye expenses, mid-single digit growth off of the core numbers, I'll call it just around 600, give or take on the full year 23.

And Leslie, I think you said on lease finance should be around $9 million a quarter, roughly five to eight of it sort of flips.

Is it fair to call it around 2021 ish on a normalized basis?

On page 21, what I'm sorry, million.

I'm sorry, for total noninterest income.

I don't know, I think you'll see a slight trend up in deposit service charges and fees on the back of NIDA. growth.

I gave you the number for lease income probably the other will trend up a little bit to us and I don't have that number right in my head, too.

Yes, I'm going to I'm going to I'm going to sound like I got the guidance.

Right.

And so when you guys just think from this kind of lending and philosophical perspective, you said you guys are getting a little bit better rate assumption, even floating rate, are you can you potentially increasing credit risk or acknowledges the other vendors backing out that gives you that better yield, but if they come back at the odds are that probably will start with raised, 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?

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.

So, you know, we're just kind of the conduit to pass that on the borrowers, the same credit, same risk rating, same names of something that is coming up for renewal.

You will get wider spreads in this market that have been 18 months ago.

So it is not about that where going down the credit spectrum, it is that the market is in a different place than it was competitively for the last four 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 it is only on the lending side that we're getting wider spreads in deposits was in a happy place like a half ago, in my mind, would be way wider.

That's not the case.

So now, it's all about great selection.

It's all about the market dynamics.

There's less competition for customers.

And 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, Sameer, just more pronounced than others.

I'm just curious if you can just quarter to quarter electrical whereby the High Point B or hospital discharge, we think about the back half of the year.

And we're not really trying to provide quarter-by-quarter guidance.

I don't know when it came out certain things are going to hit the P&L again, you typically have a little bit higher payroll expense in the first quarter.

Everybody does because of the front-loading of payroll taxes and foreign one k. contributions in HSA seeding 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, but Urban's First, I appreciate your interest.

Steven Alexopoulos, JPMorgan.

Hi, good morning.

This is Alex Lau on for Steve.

Hey, Alex.

How are you?

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 are the rates of the old CDs running off and the new rates that CDs were coming on at?

Thank you.

I don't have all 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 in terms of new money coming into it.

I don't recall exactly where the pricing is right now, but I do know that we backed off on deposit pricing on the CD pricing right around Thanksgiving.

So we have done and actually quite a bit of that right after Thanksgiving and then once again in December.

So we did get we did lower meaningfully what our promotional rates were for 12 months money, which is sort of only products, but I don't have the exact numbers in front of me, but I do believe we're making boosters.

Yes, yes, hi, fours me.

It's where we are.

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-brokered deposits in the quarter?

And what lower rate are you paying on these new deposits in how much of this is new DDA?

Yes, I would say if you look at the deposit growth, it was pretty much across every business line.

So I'd be you know, it's across all segments.

That would be why wouldn't have the detail in front of me to give you like an SIC code by SIC code breakdown of what industry segments it was, but it was pretty broadly based across 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 fairly widespread.

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 in improving with customers were willing to move balances now that March Madness is close to a year ago now?

Yes, 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 obviously, before proposal when something is in dialogue and know that it's less.

But once we get the proposal stage, our realization rate is pretty high.

By the way, somebody just texted me our team, our 12-month CD price card fees 4.5%, and we have a nine month promo at 5%.

That's been the rate for the last few weeks.

Okay.

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.

Things.

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 better.

We really haven't spent a lot of time thinking about the efficiency ratio.

To be honest with you, we wish to.

Thank you for taking my questions.

But yes, not a breakout of the components to that.

The rate environment is going to affect that balance sheet transformation is going to affect that and rather just focus on the bottom is the components.

Yes.

Got it.

Thank you.

Zachary Sech, UBS.

Hi, everyone.

It's Jack on for Brody.

Most of my questions have been answered, but sorry, I had a couple of quick ones on related to the margin.

The securities yields.

You guys had some nice increases in that over mix over the past three quarters.

Was just curious what's driving that and what's the trajectory look like over the next couple of quarters.

But 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 that, particularly if we get rate.

Got it.

Thanks for that.

And then on the deposit cost for 20 spot rate, how do you expect that to trend over the first half of the year.

I think next quarter it's going to be out yet because we're still we've got the CD repricing amendments, adding rate cuts, if you have a forward curve, comes to fruition it will start trending down over the back half of the year, maybe as soon as the second quarter, depending on.

Awesome.

Appreciate it.

I'm not showing any further questions at this time.

I'd like to turn the call back over to Ross for any closing remarks.

I'll close by saying that for a clearly a simple 2023, I'm starting the year 2024 and a very positive note, our business is I think it's got momentum and all the right places that we work so hard on and the economy and the severe of the things that we don't control are also favoring us, especially in the markets that we're at.

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.

And but the team is energized to hit the road and keep building out through 2024.

And I thank you all for joining us.

If you have any questions, of course, you could reach me Leslie directly, and we'll talk to you otherwise again in three months and thank you.

Ladies and gentlemen, that concludes today's presentation.

You may now disconnect and have a wonderful day.