BankUnited - Q3 2023
October 19, 2023
Transcript
Operator (participant)
Good day. Thank you for standing by. Welcome to the BankUnited Q3 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Greenfield, Corporate Secretary. Please go ahead.
Susan Greenfield (Corporate Secretary)
Thank you, Michelle. Good morning, and thank you for joining us today on our Q3 2023 Results Conference Call. On the call this morning are Raj Singh, our Chairman, President, and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that 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 limitations, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's 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 statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be considered 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 (Chairman, President, and CEO)
Thank you, Susan. Welcome, everyone. Thank you for joining us for our earnings call. You know, in preparation for this call, I usually ask Leslie, like a week before, if she can kind of guide me as to what are the things investors are looking for? You know, what are the hot topics? So this time I did the same thing, and what Leslie forwarded me was an email from one of the sell-side analysts, I think it might have been J.P. Morgan, with basically saying, not specifically to us, but generally bank investors are looking for like five or six things that are top of mind. So in my comments, I'm gonna go straight to those few things and try and answer them.
The things were in that order, NIM inflation, deposit stability, both pricing and flows, credit trends, unrealized losses, expense management, and the last bullet point was sort of regulatory, and in brackets, it said this really applies to larger banks. So I'm gonna try and get straight to that rather than, you know, regurgitate what's in our earnings. It's been out for a couple of hours. You probably have read where the numbers came out. But if those are the big topics, let's just talk about them directly. NIM, our NIM increased by nine basis points from 2.47%-2.56%. Just as for context, you know, if you go back, last quarter, we told you that while our NIM had gone down from Q1 to Q2, Q2 was pretty flat.
Every month was, you know, 2.47. This quarter, we went up. So if you, if you go back from January and look to now, January to February, February to March, March to April, NIM was declining. And then for the next three months, it was flat, and now for the three months after that, it's gone up. So it's, it's created a, a nice curve that I like, and, and, and I, I think, we can safely predict that, you know, this modest improvement will keep happening, in, in, in the next few months. Deposit stability is the next question. Again, you know, this, this quarter, we grew, outside of brokered, we grew about $500 million in deposits and even, grew non-interest DDA by, a little more than $50 million.
Our NIDDA to total deposits is stable at about 28%. I've been asked this question many, many times over the course of last, you know, two or three years, like: What do you think the long-term run rate sort of that ratio is? You know, where will you stabilize in terms of DDA percentage? And I've never been able to answer that question because, to be very honest, I don't know what, you know, when all is said and done, where things will stabilize. But now, looking at this data, not just for this quarter, but for the last several months, I'm beginning to get confident in saying that I think we're there or close to being there.
So, you know, and if we get another quarter or two of this, which I think we will, we will be able to declare that this seems to be the bottoming out on that ratio as well. And dare we say that we will, you know, shoot to actually improve from there and try and get above 30% again over the course of the next few quarters. Credit trends, quickly, net charge-offs, again, very low at 7 basis points. I think last quarter they were maybe 8 basis points, if I remember right. NPAs are at 40 basis points. If you carve out the SBA guaranteed portion, that's about 11 basis points off that 40. So still, you know, pretty low.
You know, they, they were slightly lower than that last quarter, but they're about, you know, kind of bouncing around in that region. Unrealized losses came in at 407. That's our AOCI is about 407, I think. Last quarter, it was a little bit better at 373, I think. Now, obviously, that's function of what's happened to rates, especially in the last few weeks. Expenses, I think we guided to you that for the second half of the year, we're going to try and keep expenses flat, and I think we pretty much delivered on that. Let me add a few other things which are not.
You know, on the regulatory front, like I said, you know, that email said it's really a question for larger banks, but I don't really have anything special to report on the regulatory front that you already haven't read in the American Banker. The rest of the balance sheet, quickly, just to go over that, securities were down $257 million. Loans, like we said to you, we're taking resi down because we've gotten overweight in resi. That was down to 25. C&I was up 100, CRE was up 46. Overall, deposits, loans came in down 274. I will make a point that even within CRE, while we had C&I growth of $100 million, we actually did push out about $300 million, roughly, of non-core C&I.
So, if we had not done that, it would have been much higher. We feel like we're getting done with, with what we need to push out in terms of transactional business, so feeling pretty good looking forward. FHLB, we paid off a little over $800 million. Brokered CDs, we paid off a little over $200 million. Actually, FHLB balances now stand lower than they were at the end of last year. So from a balance sheet perspective, we feel pretty good. Loan to deposit ratio has gone down to 93% from 95% last quarter. And despite taking the balance sheet down as much as we have, our PPNR was slightly up. So I'm feeling pretty good about the way the quarter turned out. We did build reserves this quarter.
ACL was up quite meaningfully to 80 basis points, and that's because, you know, we don't know when a slowdown is coming, if it's in a quarter or two or three, but it does feel like something will happen. The Fed has done a lot to slow the economy down and, and, and, hopefully, it's just a soft landing, but, it may be a mild recession, and we have to be ready for it. So we did build reserves up. Most of that reserve build was really because of the Moody's, you know, outlook got worse, and, when you run it through our numbers, that contributed to more than half of our provision. Quick comment on the environment. I always make a statement or two on this.
I think on the rate side, rate, economy, and regulatory, so I'll talk about all three. On the rate side, my personal opinion is I think the Fed is done. Whatever little more they wanted to do, I think the market is doing for them. And I would be surprised if there is much movement from the Fed. Maybe another move in a couple of meetings, but it feels like that story has inflected. The economy is still coming along fine, but reading more and more about how the consumer is pretty much done depleting the buildup of cash from the pandemic. So we're being very careful and vigilant on the economy to see any signs of cracking.
I think eventually we will see some. And on the regulatory front, you know, a lot that is about to happen, that we're all reading about. It impacts, obviously, banks in the 100 to trillion range a lot more. There'll be some trickle-down effect for us. So, but on the day-to-day basis, I think everything is fine on the regulatory front. I don't think anybody is being unreasonable. And, yeah, there will be a little more burden on the regulatory front that we'll all have to deal with, but I think it's sometimes a little overplayed. So with that, am I missing anything?
No, I just wrote these things down on a piece of paper, so, you know, I'll jump in if and interrupt Tom and Leslie as they are talking through their stuff. But, once again, thank you for joining us. I'll turn this over to Tom.
Tom Cornish (COO)
Great. Thank you, Raj. A little bit more follow-up on the discussion on deposits, and I'll link it a bit with our dialogue. You know, last quarter, we talked about having a good level of confidence and a strong deposit pipeline. We saw that, you know, come to fruition, you know, in this quarter with the operating lines of business delivering, as Raj said, almost $500 million of deposit growth. That was really across all of our operating businesses, so it was great to see that.
484 was the exact number. You know, as we look at this quarter and think about what our deposit pipeline looks like, it continues to be, you know, significant and kind of in line with what we saw, you know, last quarter in executing this, the strategy of, you know, core operating accounts, you know, NIDDA business, treasury management business, and so forth. So, you know, our pipeline overall is not diminished from what it was.
You know, last quarter, despite, you know, bringing on $484 million of new deposits during Q3. So we feel good about that. There's some information in the deck on slide eight. Our largest deposit vertical continues to be the Title Solutions business, with deposits of about $2.8 billion as of September 30th. And there's no other real significant concentration within the deposit book. Talk a little bit more about the loan side. You know, consistent with the strategy we've outlined for you, Resi declined by $225 million. CRE was up about $46 million for the quarter. The overall outlook for CRE is a little bit more challenging in the market today.
We're not seeing as strong of pipeline opportunities at today's interest rate level and cap rate level. You know, less deals are making sense. So, we did get $46 million in growth, and it, you know, that asset category, loan category has been relatively flat all year if you look at where we started off the year. And, you know, market conditions remain, you know, challenging. We're happy with our overall portfolio that we have, but new generation right now is not easy. As Raj said, C&I was up, you know, $101 million for the quarter. That number really was a lot better, absent, you know, the pushout of non-strategic relationships that Raj talked about.
We had an opportunity to exit in commitments about $650 million of commitments for the quarter, which was just slightly less than $300 million, you know, in UPB. All of these were relationships that were not core to our go-forward strategy, and generally, they did not either meet the pricing opportunities that we see in the existing market today or any deposit strategy, you know, that we're moving forward with. So we took the opportunity to exit those in the quarter. If we look at kind of core core, I guess, would be the best way I would say it, you know, we had actually a terrific quarter in small business lending. We had a terrific quarter in the commercial segment.
All of those credits that we talked about are in the corporate banking segment, and even that grew after, you know, walking away from $650 million of commitments. So I think as Raj said, we're while there will be other things like that that will come up and redials of deals that will come up, that's probably the largest amount we're going to see in a quarter. So we're, you know, pipelines in that segment remain, you know, very strong across all of our geographic markets and across all of our industry segments. So we feel pretty good about, you know, the C&I business as a whole across all segments.
The franchise equipment, municipal finance business continued to trend down modestly, and mortgage warehouse lending was down $116 million, you know, in response to what's happening in the residential, you know, mortgage, mortgage market as a whole. Average rate on new production for the quarter was between 8 and 8.5. For C&I segment, we're seeing, you know, generally deal opportunities, you know, kind of in the SOFR plus 330 kind of range. So that's part of what's happening in this trade-off of opportunities, where we have the ability to exit credits that are significantly, you know, less than that in yield and reinvest it in more relationship-oriented transactions, where we're currently seeing better yields. For the CRE pipeline, what we're seeing is yields kind of just slightly under the 8% level.
Spend a little bit of time, a little bit more on the CRE, you know, portfolio. You've got significant detail on Slides 12 through 14 in the supplemental deck, but a few overall comments. Our CRE portfolio continues to be, you know, modest to the overall bank's balance sheet at 23.5% of loans. Our CRE to risk-based, total risk-based capital is 168%, which is well below the regulatory guidance threshold. To date, any potential, you know, concerns that we have in any loans are not really broad across any asset category. They're very specific to a particular loan or a particular submarket. As of September 30th, the weighted average LTV of the CRE portfolio was 56%.
The weighted average debt service coverage ratio was 1.8, and about 15% of the CRE portfolio matures in the next 12 months. About 8% both matures in the next 12 months and is fixed rate. So our maturity schedule over the next 12 months is relatively light. You know, specifically to the office sector, and we feel good about office overall, the portfolio that we have in particular, it's $1.8 billion. Of that $1.8 billion, about $200 million is in traditional medical office, you know, facilities. So the that's kind of different than the standard office portfolio that everyone looks at. But the total is about $1.8 billion with $200 million in medical office. The weighted average LTV of the office portfolio was 64%.
Weighted average debt service coverage ratio was 1.7 as of September 30, and you have detail in there, giving you a breakdown geography-wise, asset class-wise. But as of 9/30, 95% was pass rated. 58% of the office portfolio is in Florida. Virtually all of that is suburban office. The Florida market in all major metropolitan areas, you know, continues to perform very well. So we feel pretty good about where we are from a Florida perspective. There's some other slides on 14 that give you some breakdown between Florida and the New York market. With respect to the New York state portfolio, 44% of that portfolio is in Manhattan. It's a little under $200 million of office exposure in Manhattan.
Our properties currently are 95% leased, and we only have a 5% rollover in the next 12 months. Overall, the office portfolio has an 11% rollover in the next 12 months. Now, when we look at sort of credit quality within the overall CRE portfolio, if you look at 12/31/2022, we had $91 million that were rated below pass. This quarter, we had $90 million. So, you know, the credit trends have been very stable in this portfolio, and, you know, we're watching it closely, but we feel very good about the overall CRE portfolio and good about our office portfolio, given the properties' geographic locations and mix between suburban and office. So with that, I'll turn it over to Leslie.
Leslie Lunak (CFO)
Great. Thanks, Tom. Just to reiterate, net income for the quarter was $47 million or $0.63 per share, and earnings this quarter were impacted by the reserve build that we, that we took this quarter. Great news about the net interest margin, up to 2.56% from 2.47% last quarter. We're starting to see all of the balance sheet strategy that we've laid out for you in the past, getting some traction and having a positive impact on the, on the NIM. Total earning asset yields increased from 5.30% to 5.52%, with securities going up from 5.19% to 5.48%, while the yield on loans went up from 5.53% to 5.54%. Cost of deposits was up 28 basis points. This compares to a 41 basis point increase last quarter.
So we're continuing to see that trend of slowing in the rate of increase of our overall cost of deposits. It now sits at 274. We also saw the decline in relatively higher priced wholesale funding, having a positive impact on the NIM this quarter. The provision, I'm sure you're all going to ask questions about the provision, so I'll try to answer them before you ask them. The provision was $33 million this quarter, and the ACL to loans ratio increased from 68 basis points to 80 basis points, even though net charge-offs remained very, very low. The biggest driver of the provision this quarter and the increase in the ACL was the impact of the Moody's forecasts in the model and a slightly less favorable economic outlook in those forecasts.
The things that were really drivers of that, the biggest one was really the rate forecast, which has a little bit higher for longer rate forecast in it than we saw last quarter, and there were a couple of other factors as well, but that was the most significant one. Changes in portfolio composition, a little bit of a bump up in specific reserves and, some risk rating migration also impacted the reserve. And if you look at slide 16, you see a waterfall chart of all the different factors that impacted the reserve this quarter. Specifically, the CRE office portfolio, the reserve was up to 99 basis points compared to 83 at June 30th. So a little bit of build there as well. Last quarter, we provided you some stress testing results.
We repeated those in the deck this quarter, just in case you, you're interested, but they haven't changed. Nothing really to say about non-interest income and expense this quarter. No real material or significant trends there. And I think Raj already mentioned that we would expect, you know, non-interest expense for Q4 to remain relatively flat again. All of our capital ratios increased this quarter. Holding company CET1 was 11.4%. Pro forma, including AOCI, 9.8% at September 30th, so very robust capital levels, and liquidity remains robust as well. There are some details on that in the slides, if you're interested. And with that, I'll turn it back over to Raj for closing comments.
Tom Cornish (COO)
I would say that I was very good in not interrupting either of you.
Leslie Lunak (CFO)
You were.
Tom Cornish (COO)
A time or two, but I did not. Let's turn it over for Q&A.
Operator (participant)
Thank you. As a reminder to ask a question, please press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again. Please stand by while we compile our Q&A roster. Our first question is going to come from the line of Will Jones with KBW. Your line is open. Please go ahead.
Will Jones (Associate VP)
Hey, great. Good morning. Thanks for the questions.
Leslie Lunak (CFO)
Good morning, Will.
Will Jones (Associate VP)
Hey, so Leslie, you guys said—I wanted to ask about the reserve. You know, you guys have really, if you look back over the past 4 quarters or 5, you've really been steadily building since the end of last year. You know, I can appreciate that, like, up this quarter was, you know, really another macro-driven build. But just wanted to confirm that there's really not anything underlying you're seeing in the book that justifies any of this. I know classifieds and criticized did see a little movement as well as maybe some NPAs, but just wanted to confirm that. And just as we think forward, just wanted to get, you know, your sense on what the messaging is on the provision as we look in the next year.
Do you really feel like, you know, the lion's share of reserve build is done from here? And, you know, to the extent that, yes, while we may be in higher for longer, you know, a higher for longer scenario, you know, Moody's is, you know, kind of stable, that, you know, the reserve would too stay stable or, or if there's really a higher number in mind that, that the reserve needs to be at?
Raj Singh (Chairman, President, and CEO)
You know, well, it's, it's not really that we're trying to solve for a number.
Leslie Lunak (CFO)
Right.
Raj Singh (Chairman, President, and CEO)
I actually joke with the management.
Leslie Lunak (CFO)
If that was true, I'd give you a very easy answer to your question, but.
Raj Singh (Chairman, President, and CEO)
Yeah, it is. CECL has brought us to this place where, you know, I joke about this often that the economists at Moody's can wake up on the wrong side of the bed and impact our P&L in any given quarter than anything else we do. So unfortunately, that is who we're wedded to. So it'll depend a lot on what Moody's puts out in three months from now, and what, how their outlook changes. That is a big driver. Now, I will say this much, that if, you know, going into a recession or a slowdown, you know, is painful with all these bills that happen, it has the exact mirror opposite effect on the way out.
So what, what can feel like pain, can feel like, you know, gain, a year down the road. But, but who knows? We're not trying to solve for a number that if we can get there by a certain amount of time, that's not what this is. This is purely based on the math that works off of Moody's forecast, and I'm not sure how they'll forecast 60 or 90 days from now.
Leslie Lunak (CFO)
Yeah. You know, the other thing I would say, you know, the other thing that is having some impact and will continue to have some impact as we see the portfolio composition shift [crosstalk] out of residential into commercial. [crosstalk] You will also see the reserve [crosstalk] gradually build because the commercial portfolio does carry, and you can see in our slides, we show you the allocation by type of loan. So you will see some gradual reserve build as that portfolio shift continues to happen as well. That's the only other thing that I would put out there.
Raj Singh (Chairman, President, and CEO)
But that's going to be gradual.
Leslie Lunak (CFO)
Yeah.
Raj Singh (Chairman, President, and CEO)
Because the portfolio is not going to change overnight.
Leslie Lunak (CFO)
Exactly.
Raj Singh (Chairman, President, and CEO)
But gradually, absolutely, like, that'll happen again.
Leslie Lunak (CFO)
Exactly. But there's nothing, it's not like, oh, my gosh, you know, we're seeing trouble brewing in the portfolio, we better build reserves. It's, it's not that.
Raj Singh (Chairman, President, and CEO)
Yeah.
Will Jones (Associate VP)
Got you. Got you. No, that, that's very helpful. I know CECL is really kind of its own monster, but-
Raj Singh (Chairman, President, and CEO)
Yes
Will Jones (Associate VP)
That, that's helpful. Thanks. And then I wanted to turn to the margin. The margin, you know, it was great to see and collect this quarter. It really feels like it was a story of, you know, the remix on the funding side, and it's, it's really been, you know, partially enabled by some of this great deposit growth you're seeing. And, you know, it feels like, you know, momentum is continuing there. And Raj, you mentioned the margin was up, you know, each consecutive month of this quarter. Just curious where the margin ended the quarter, maybe what the margin was in the month of September.
Leslie Lunak (CFO)
So, I think. I don't think that's what Raj said.
Raj Singh (Chairman, President, and CEO)
No. I think last quarter we did get into the details of month by month. I'd rather not go into the, you know, make this a trend.
Leslie Lunak (CFO)
Yeah. Month by month can be really quirky.
Raj Singh (Chairman, President, and CEO)
Yes
Leslie Lunak (CFO)
Because if one weird thing happens in a month and you're annualizing a one-month result. So I don't think looking at it month by month is really very helpful.
Raj Singh (Chairman, President, and CEO)
But we will say that Q4, you know, we think it will be, you know, margin will be modestly up again. Unless there's something really bizarre that happens in the quarter, based on what we're seeing so far, it looks like, you know, this trajectory will continue. It's not going to get to 3% in the next quarter, but it will keep improving from where it is.
Will Jones (Associate VP)
Got you. Okay, that makes sense. And I guess just, you know, thinking a little more intermediate term, you know, to the extent that, you know, this deposit pipeline continues to materialize, you know, you see, you know, maybe, you know, a little less FHLB in the funding mix, you know, moving forward, and you get some asset repricing that keeps flowing through. You know, do you feel like the margin, you know, continues to expand, like, through 2024, or do you feel like it, you know?
Raj Singh (Chairman, President, and CEO)
So, I'm under strict orders from Leslie not to talk about 2024 because we haven't done it, the whole planning cycle. So.
Leslie Lunak (CFO)
I'm over here now with my pants.
Raj Singh (Chairman, President, and CEO)
We will give you guidance. Yeah. We will give you guidance, as we always do, in January for the full year. But, right now, we'll just talk about Q4. And, you know, in terms of what we're trying to do in Q4, it's not that different from what we're trying to do in Q3. Still optimize the balance sheet, grow the right things, bring down resi, bring down securities portfolio, grow C&I, grow DDA, grow total deposits, and bring down wholesale borrowings. That's, you know, we keep doing that, margin will fall in the right place and, you know, it should be a good quarter again. And, you know, I'll make one point about demand deposit growth. I mean, that's what I'm actually the most excited about.
We talked to you about a pipeline last quarter. The pipeline is similar this quarter. We did convert a lot of that to good business, but the net growth in DDA was about a little over $50 million. That's the net number, right? What is very hard for us to predict is that still, that change that is happening in our existing deposits, where people are moving out from DDA to interest bearing or just using the money for, you know, buying things, that trend is still continuing. Maybe slightly slower, but it's still continuing. And the reason we have some DDA growth is because the new business we're bringing in this quarter outpaced that natural trend that you're seeing all over the industry, by the way.
So we're so happy about the pipeline that we have, especially in light of, you know, what a challenging Q1 this was. To be able to stand here in October and say that we have a good pipeline and that we've, you know, in the last three months, we've actually converted enough of it to produce DDA growth, I'm very happy about it.
Will Jones (Associate VP)
Great. That's very helpful. And, you know, the last thing I really just wanted to hit on, you know, I know that the buyback has been big for you guys in the past. We kind of paused that conversation, you know, in the first half of the year with just, you know, naturally given what was going on. But it feels like now we've really kind of removed ourselves from that, you know, kind of disruption, and it feels like with where the stock's trading today, it's just a huge opportunity for you guys. Is there any update on, you know, where you stand with the buyback?
Raj Singh (Chairman, President, and CEO)
Last we talked to the board about it, and, you know, unanimously agreed that the time was not ready yet, was maybe six weeks ago, Leslie, right? About six weeks back.
Leslie Lunak (CFO)
Yes.
Raj Singh (Chairman, President, and CEO)
We will talk to them again in four weeks, in mid-November. My best judgment would be I think it's still early. I think we need to wait and probably think about it in the new year, not this quarter.
Will Jones (Associate VP)
Got it, understood. Thanks for the color, guys.
Operator (participant)
Thank you, and one moment while we get to our next question. Our next question is gonna come from the line of Graham Dick with Piper Sandler. Your line is open. Please go ahead.
Graham Dick (VP of Equity Research)
Hey, good morning, everybody.
Raj Singh (Chairman, President, and CEO)
Good morning.
Tom Cornish (COO)
Good morning.
Graham Dick (VP of Equity Research)
So I just wanted to hit on the loan side of things. I saw that you had, you know, about $300 million in commercial loans that you exited. I just wanted to hear a little bit more about your strategic thinking here. You know, what kind of yields were on these portfolios, or what kind of spread, rather, if you can include the deposit relationship? And then you mentioned that there's a little more to do here. I'm just wondering what that would look like, maybe over the next couple of quarters, and how it might impact your overall growth outlook. Because if I back this out, the $300 million this quarter, looks like balances were actually, you know, essentially flat.
So just wondering about the size of loan portfolio going forward and maybe the overall direction that takes the balance sheet as well?
Raj Singh (Chairman, President, and CEO)
Let me go sort of loan category by loan category. So resi was down $225 million. I expect resi to behave very similarly next quarter, for that matter, even the quarter after that, two or three, four quarters. Because like we've said, we're too resi heavy, and taking it down about $200 million or so every quarter sounds like a good strategy. C&I was up $100 million, but that was net of about $300 million that we pushed out. As Tom said in his comments, we don't see that kind of a pushout happening in the future. Maybe some here or there that we will still exit. The stuff that we're exiting generally is non-deposit, you know, transactional business. Some of them are SNCs.
And where we don't really have an expectation that, you know, we'll be able to get deposits, sometimes you just do it, and eventually, deposits come. But when we convince ourselves it's not happening and spread is too tight, then what, what are we doing in that? And that's what we've exited. So I would say that what we were exiting was business put on a year or two years ago at spreads of like, you know, SOFR plus 150-200, in that range. The business that we're doing now, the pipeline that Tom referenced in the C&I space is over 300. So you know, SOFR plus 300, 320, 330, in that range.
So it's a really good time to be writing new paper, and the old stuff that is being run off is meaningfully lower in terms of profitability. CRE, while we grew about $45-$46 million this quarter, just looking at the pipeline, it doesn't look like it's gonna grow, given, you know, there's not much happening in the CRE world in terms of transactions. So our best guess is it'll probably be flat. Small business will grow, but it doesn't really move the needle that much in terms of the total balance sheet. And, you know, our commercial finance subs, which is the franchise finance and the equipment leasing business, has been running down now for a better part of two or three years, and that trend will continue.
So when we're not lending, your guess is as good as mine. I always say that it can't go any lower utilization, but, you know, it keeps surprising me, it does go down. The mortgage market is probably having one of the toughest years ever in terms of origination volume, so it's very much tied to that. If there's a bit of a pickup in rates turnaround, doesn't feel like they are going to, but if they do turn around, there's a little bit of a refi opportunity, it'll grow, otherwise it won't. But again, the numbers are so small that I don't think it really moves the needle at the top of the house.
Tom Cornish (COO)
Yeah, I might just add a little bit of detail to that. If we look at, you know, when you exit, there's two kind of time frames for exiting. One is when you have a maturity. Those are obviously easier to predict. The second is when you have an event, and usually, the event is a redial because there's a transaction opportunity or whatnot. Those are not as easy to predict. So, while I don't think there's going to be too much more of that to the extent that it was in Q3, from a strict maturity perspective, there are situations that could come up with, you know, existing credits that are not maturing, where there's an opportunity to exit.
Because what's really clear as we look through the dynamics of this trade-off that we're consistently making is if you take any, you know, large credit in the marketplace, let's say it's a $50 million deal, and we have the opportunity to exit that, we can put on two $25 million deals in bilateral relationships, which probably is 75 basis points higher than what we're exiting and comes with deposit and treasury management business. Then that's the trade-off we're consistently looking to make.
Raj Singh (Chairman, President, and CEO)
Yeah.
Graham Dick (VP of Equity Research)
Okay. So all in, it kind of sounds like, you know, flattish to maybe slightly down loan balances as a whole, but a much more, you know, profitable portfolio. Is that kind of a fair way to look at it right now?
Raj Singh (Chairman, President, and CEO)
Yeah.
Leslie Lunak (CFO)
Yeah.
I think over the course of the next quarter, yeah.
Graham Dick (VP of Equity Research)
Okay, cool. And then I just, you mentioned Shared National Credits in there. I just wanted to know, what's your all's total SNC exposure right now as a percentage of, of loans?
Leslie Lunak (CFO)
It's about $4.7 billion in the aggregate, based on the strict, you know, regulatory definition of a Shared National Credit, which is. Tom, if you want to provide any more color on that question.
Tom Cornish (COO)
Yeah. The, the definition has expanded a lot, you know, over the last couple of years. So it, it can encompass anything from what you might think of as being a traditional Shared National Credit, which would be a, you know, a multi-billion-dollar credit, you know, led by one of the major banks with 25 banks in the deal, to a deal that we agent, as long as the debt stack is more than $100 million. It can be, you know, deals that we would typically be in that are club deals among us and a couple of banks where we have a significant share of the wallet. We might be, you know, the collateral agent, we might be the doc agent. You know, we could be in a couple of different positions. We would have part of the depository business.
So when you look at kind of the classical Shared National Credit business, it's a, it's a portion of the overall SNC business, but it's certainly not the entirety of it. And the other parts of it, you know, we have built syndications capability on both the real estate side and the corporate banking side. We want to syndicate credits. We want to be a lead bank and control the deposit business. So that portion that would be over the $100 million threshold and have three or more banks would be a SNC. And we continue to be interested in club deals where we like a relationship and have business, but, you know, have a certain guideline on how much exposure we want to take in those deals. That's highly desirable business from our perspective, but it would also, you know, be a SNC.
So, as the guidelines have changed over the last few years, you've got to be a bit more careful with this nomenclature than maybe we were a few years ago.
Leslie Lunak (CFO)
Yeah.
Graham Dick (VP of Equity Research)
Yeah, totally understand. And I get if you don't have this number, but it definitely seems important and much more profitable to be the lead agent on these deals. What amount of that $4.7 billion are you guys the lead on?
Leslie Lunak (CFO)
We don't have all of that detail-
Graham Dick (VP of Equity Research)
Okay.
Leslie Lunak (CFO)
- available right now.
Graham Dick (VP of Equity Research)
Okay.
Tom Cornish (COO)
But the-
Graham Dick (VP of Equity Research)
That's fine. Understand.
Leslie Lunak (CFO)
Yes, absolutely.
Tom Cornish (COO)
Far better to, for a variety of reasons, [crosstalk] to be the agent on the deal, because generally the agent gets 75% of all ancillary business. Although in the SNC market today, everybody wants part of the ancillary business, and that's the big challenge in the SNC market, is there's not enough ancillary business to go around everybody.
Graham Dick (VP of Equity Research)
Right. Yeah, understood. And then I guess the last thing I wanted to touch on is just capital and the CET1 ratio, maybe including those AOCI losses of 9.8%.
Leslie Lunak (CFO)
Yeah.
Graham Dick (VP of Equity Research)
Is this the ratio you guys are managing around right now? And then is there a specific near-term, I guess, level you guys are looking at?
Leslie Lunak (CFO)
I mean, I would say this tends to be the ratio that most stakeholders are focused on and interested in. So we do pay a lot of attention to it. It's not the only one that we look at. Obviously, we're aware of TCE to TA and Tier 1 and leverage as well. I think in terms of a target, like Raj said, I think in the very near term, we're comfortable where we are and, you know, we'll, as we go through our capital planning process at year-end, we'll think through and discuss with the board the outlook going forward around targets. Another way of saying I'm not prepared to give that information today.
Graham Dick (VP of Equity Research)
No, I understood. All right. Well, thank you, guys. I appreciate it.
Operator (participant)
Thank you. One moment while we move on to our next question. Our next question is going to come from the line of Jon Arfstrom with RBC Capital Markets. Your line is open. Please go ahead.
Jon Arfstrom (Managing Director)
Hey, thanks. Good morning.
Leslie Lunak (CFO)
Morning, Jon.
Jon Arfstrom (Managing Director)
Leslie, I'm not going to ask you about the 2024 margin, but.
Leslie Lunak (CFO)
It's okay if you do, I won't answer you.
Jon Arfstrom (Managing Director)
No, the question is that you made a comment about over the course of the next quarter, this trend is going to continue, and I don't know if it's for you or Raj, but how long does it take to accomplish what you want to accomplish on the balance sheet, remixing the assets and remixing the liabilities? I hate the term what ending are we in, but I'll just ask it. How, how long does it take to get to where you want to go?
Raj Singh (Chairman, President, and CEO)
I think we'll be in a better position to answer that once we go through our year-end planning process. So we'll probably be able to answer that in January.
Leslie Lunak (CFO)
Yeah, I mean, I think it's safe to say it's not a one or two quarter effort.
Jon Arfstrom (Managing Director)
Yeah.
Leslie Lunak (CFO)
You know, it's going to take some time.
Jon Arfstrom (Managing Director)
Yep. So we can expect more of the same, essentially. I mean, we have to make some assumptions, but we can expect more of the same over time. Okay.
Leslie Lunak (CFO)
In the near term, sure. Yeah.
Jon Arfstrom (Managing Director)
Yep. Okay. Raj, what do you want the balance sheets to look like when you're done?
Raj Singh (Chairman, President, and CEO)
Well, if you look back at our balance sheets pre-pandemic levels and compare it to now, it looks quite different.
Jon Arfstrom (Managing Director)
Okay.
Raj Singh (Chairman, President, and CEO)
It's gotten too heavy in securities, too heavy in resi. And I think the pre-pandemic norm is kind of where we want to take it. We don't want to take resi down to zero, but we certainly have a lot of work to do in bringing it down to a more sort of reasonable level. And so I think a good guide might be going back to 2018, 2019, and taking a look at our mix, not just with loans, but also with securities. I think that's what we're looking for. On the right side of the balance sheet, obviously, we don't want to go back to 2018, 2019. We want to kind of make progress on where we are today at 28% DDA. I'd like it to get to 32%, 33% DDA.
I think we can get there over time.
Jon Arfstrom (Managing Director)
Okay, good. Anything you'd call out on the non-interest-bearing growth this quarter on the drivers?
Leslie Lunak (CFO)
No, anything.
Tom Cornish (COO)
Nothing extraordinary.
Leslie Lunak (CFO)
I think it's just, you know, across the franchise, just continued progress pursuing that pipeline.
Tom Cornish (COO)
Lots of new relationship wins.
Leslie Lunak (CFO)
Mm-hmm.
Jon Arfstrom (Managing Director)
Okay. Okay, yeah, I guess that's what I was getting at as well. Okay. And then, Tom, maybe a question for you, last one for me, but I understand what you're saying on the commercial office, the CRE office portfolio. I'm curious what the discussions are like when these renewals come up, how difficult are they with your clients? And then secondarily, is there anything different between what you're seeing in New York and Florida? Thanks.
Tom Cornish (COO)
Yeah, I would say, the renewal discussions, generally, as, as the metrics show, the portfolio is performing very well. So right, right now, there is. You know, we have seen a couple of, opportunities pay off because people have gone to the CMBS market, but there's not a big alternative market for office right now. I mean, everybody's kind of got what they got. The, you know, there's some small openings here and there, but, you know, generally, our renewal conversations are going, you know, well, because the performance of the properties is generally very good. And we know we have strong debt service coverage ratios. We have strong, you know, leases, not, you know, in every single property. Obviously, there's always a couple of the, you know, loans that you're looking at that are slightly different.
But generally, the occupancy is very good. The lease rollover is manageable, that they have. As I said, the total 12-month lease portfolio rollover is about 11%. So, you know, the conversations generally, you know, go pretty well. I mean, our properties in New York, you know, we don't have that big of a. You know, when I say New York, I'm specifically referring to Manhattan.
Jon Arfstrom (Managing Director)
Yeah.
Tom Cornish (COO)
Our properties in Manhattan, you know, we have a half a dozen or so. The lease rates are, you know, in the mid-90s. The properties have low levels of leverage and are performing well. They're starting to see a gradual return to the office. I'm not sure what inning we're in, but we're in the early part of the baseball game. But, you know, they're reporting people are coming back to the offices, you know, gradually. When we're around our office on 57th and Park, there's certainly a lot of people on the street. If you look at ridership on the subways, if you look at, you know, the metrics that people are following, people are gradually returning back to the office.
So, you know, we're gonna see that portfolio gradually be reduced over a period of time through amortization and some selected movements to the CMBS market. But it's fairly stagnant right now, but performing well.
Jon Arfstrom (Managing Director)
Okay. And maybe to Florida versus New York, is there any material difference? I know there's. It's all granular, but anything there?
Tom Cornish (COO)
Yeah, the difference in. Well, Florida's different. Florida is different from New York, and then different markets in Florida are different from different markets in Florida, so.
Jon Arfstrom (Managing Director)
Sure.
Tom Cornish (COO)
You know, if you look at, you know, the Miami market in particular, where we do not have any CBD exposure, but the Miami market is extremely strong right now. The Palm Beach market is very strong. Tampa continues to show good strength, particularly in the suburban, you know, market area. We have an Orlando portfolio that, again, is not a CBD portfolio, but predominantly in the northern suburban office markets. All of those continue to perform, you know, very well. These are typically three, four, or five-story suburban buildings that house medium-sized businesses that are located close to where the employees live. And, you know, the general trends are people are in the office three, four days a week, and the properties are performing well.
Jon Arfstrom (Managing Director)
Okay. All right. Thank you. Very nice quarter.
Operator (participant)
Thank you. And one moment as we move on to our next question. Our next question is gonna come from the line of Steven Alexopoulos with JP Morgan. Your line is open. Please go ahead.
Janet Lee (VP of Equity Research)
Good morning. This is Janet Lee on for Steve Alexopoulos. I want to go back to reserves for a second and how the higher rate forecast for Moody's is the largest driver of the build in reserves. Is this really tied to your assumption that rates higher for longer will increase the odds of a recession?
Leslie Lunak (CFO)
It's not tied to our assumption. It's the assumption that's embedded in the Moody's economic forecast that we feed the model.
Tom Cornish (COO)
Moody's assumption.
Leslie Lunak (CFO)
Yeah, it's Moody's assumption.
Janet Lee (VP of Equity Research)
Right.
Leslie Lunak (CFO)
It's not tied to our assumption. But, you know, it is certainly tied to the fact that in the model, a higher rate environment will put some stress on maturing and repricing loans. And, you know, that's the driver. I mean, these models are extraordinarily complex, Janet. But yeah, at a high level, that's what's going on there. And there are other things that work in there, too. That was just the one that had the most impact.
Janet Lee (VP of Equity Research)
Right. Okay. Because when I was looking, when I was comparing Moody's August and May forecasts, unemployment assumption hasn't changed through 2025, and not much change in GDP.
Leslie Lunak (CFO)
Actually, at a regional level, the trajectory of the unemployment path has changed. You know, I know everybody wants to look at the national unemployment rate and national GDP and correlate to that, but these models are just far more complex than that, and I can't get into all those details. It's just, you know, there's a lot going. My point is, there's a lot going on in there besides just national unemployment and national GDP.
Janet Lee (VP of Equity Research)
Okay. So your scenario contemplates like local markets. It's not just generic, national.
Leslie Lunak (CFO)
Yes, that's how, yes, that's how these our models work. It's based on, it's done at the submarket level. Yes.
Janet Lee (VP of Equity Research)
Okay, got it. Can you remind me what unemployment rate is embedded in your current reserves then?
Leslie Lunak (CFO)
Well, it's different in New York than in Florida. It's different in Miami than in Tampa. It's different in, you know, so that's a pretty complex question, but it's.
Janet Lee (VP of Equity Research)
Okay, no overall.
Leslie Lunak (CFO)
It averages somewhere in the low fours.
Janet Lee (VP of Equity Research)
Okay. And just following up on, on reserves. Looking at the franchise finance segment, are you seeing any stress building in that segment? Looks like it's still low.
Leslie Lunak (CFO)
It's really one loan.
Janet Lee (VP of Equity Research)
But it looks like it more.
Leslie Lunak (CFO)
It's really one loan, Janet, that migrated down to nonaccrual this quarter, and that we put some specific reserves on. And it's a kind of a COVID leftover, I would say. They just never were able to dig their way out.
Janet Lee (VP of Equity Research)
Okay, got it. And last question on, on NIM and NII. So is it fair to say, like, theoretically speaking, you'll get more benefit from NIM point of view if the Fed cuts rates sooner when considering your portfolio mix? Or do you get more benefits if rates stay high, you know, higher for longer and, and benefits the fixed asset repricing?
Leslie Lunak (CFO)
To be honest, Janet, the most impactful thing is mix, by far. By far. Funding mix and loan mix are far more impactful. The balance sheet, the static balance sheet is relatively neutral from an interest rate risk perspective. So mix, how the mix evolves, is the thing that really will impact the NIM much more so than what the Fed does or doesn't do.
Tom Cornish (COO)
DDA growth. That's why it's the number one priority in the bank.
Leslie Lunak (CFO)
Yes.
Janet Lee (VP of Equity Research)
All right. Thank you.
Leslie Lunak (CFO)
You're welcome.
Operator (participant)
Thank you. And one moment while we move on to our next question. And our next question is going to come from the line of David Bishop with Hovde Group. Your line is open. Please go ahead.
David Bishop (Director)
Yeah, thank you. Good morning.
Tom Cornish (COO)
Good morning, David.
David Bishop (Director)
Quick question, Raj, Leslie. You guys have done a nice job tamping down the level of expense growth. Anything looming? I know you haven't done budgets for next year, but anything looming that could drive that growth rate materially higher next year? Are there any pending team lift outs or teams you're targeting that could move the needle there materially?
Raj Singh (Chairman, President, and CEO)
Actually, we forgot to mention on this call that we did hire a C&I head for Texas. So last quarter, I think we told you about CRE business had been launched. Took us a little longer than I would have wanted on the C&I front, but a press release on that hiring will be going out in the next day or two. So outside of that, you know, we're always looking. We did make some, you know, good hires in the April-May timeframe. So there's nothing in particular that jumps out that there's a big team or anything, but there are always producers that we're bringing in. At the same time, remember, we're keeping expenses flat, so there are some people that we're changing out as well.
Our focus is so much on deposit growth and DDA growth. If you don't cut that, you know, your incentive plan may have changed so much that some people may choose to not be here. So, I would say there's a little bit of recycling that has happened simply because our priorities are so focused on the right side of the balance sheet. So, but there isn't any other notable thing to talk about other than the C&I hire that started, I think, this Monday, right, Tom?
Tom Cornish (COO)
Correct.
Raj Singh (Chairman, President, and CEO)
Yeah.
David Bishop (Director)
Got it. Appreciate that color.
Tom Cornish (COO)
We're always consistently trying to improve the mix and talent of the people that we have. I mean, that's a constant process of talent management is, you know, continuously, you know, working on attracting the right talent, and you always will have people that are not, you know, meeting whatever standard we set, and also having the discipline to make those mix changes is important.
David Bishop (Director)
Got it. And then in terms of the deposit success story this quarter, curious, Raj or Tom or Leslie, can you attribute some of that to Texas, or are you starting to see that contribute to the bottom line? And I don't know, and had you disclosed the dollar amount of the deposit pipeline? If so, just curious where that stood relative to last quarter.
Tom Cornish (COO)
You know, I would say when you look at it, it's no—you know, the C&I portfolio in particular is so granular, you know, across the board. I would attribute it more to efforts in certain, you know, segments of the loan categories in C&I. You know, if I look at what grew, you know, for the quarter, we grew, you know, what I think is really kind of core parts of our business strategy, which was, you know, manufacturing, wholesale trade, logistics, international trade, because of the markets that we're in. Healthcare had nice growth.
Those are really the four segments of the C&I portfolio that grew most, but it's, it's across, it's a little bit across the board in every segment that we're in, where, you know, we've seen, you know, good growth in what I would call our more traditional long-term markets, and we've, we've seen nice growth in, you know, in the newer markets that we have opened up over the last few years.
David Bishop (Director)
And that, would that also translated to the deposit side in Texas?
Tom Cornish (COO)
No, no. And typically, you know, again, back to this word mix that we're using a lot. When you start off a new office, generally, the relationships tend to be more loan-oriented, and over a period of time, you're able to then expand once you create, you know, a reputation in the marketplace, you create some critical mass. Anytime you enter a new market, it's a multi-year strategy to fully develop that market out. And, you know, markets that we want to go to are attractive and competitive. We have not been able to find any attractive and non-competitive markets to go to. Raj keeps asking me to find one, but I can't seem to find one. So it takes the right talent and time to build these.
They tend to build faster on the left-hand side of the balance sheet than the right-hand side of the balance sheet.
David Bishop (Director)
Got it. One final question. Leslie, the tick up in special mention loans, just curious if there's any segments or industries that you'd call out to drive that increase?
Leslie Lunak (CFO)
Yeah. No, there really is nothing in particular to call out. I think this looks to us more like normalization of credit. There don't tend to be any particular portfolio segments where we're seeing signs of trouble. And the other thing I'll say is that we don't really, at this point in time, we don't really see any real loss content in any of those assets that migrated to special mention.
David Bishop (Director)
Got it. Appreciate the color.
Operator (participant)
Thank you, and one moment for our next question. Our last question is going to come from the line of Samuel Varga with UBS. Your line is open. Please go ahead. Samuel, your line may be on mute. All right, we will go ahead and I will go ahead and hand the conference back over to Raj Singh for any further remarks.
Raj Singh (Chairman, President, and CEO)
As always, thank you very much for joining us and listening to our story. Feel pretty good about where the bank is and the progress that we've made in a very short period of time. We look forward to speaking with you again with a lot more information in three months. Until then, stay safe. Thank you. Bye.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.