Byline Bancorp - Q1 2024

Transcript

Brooks Rennie (Head of Investor Relations)

Under the supplement, but not substitute for the most directly comparable GAAP measures. Reconciliation of each non-GAAP financial measure to the comparable GAAP financial measures can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement in non-GAAP financial measures disclosures in the earnings release. As a reminder for investors, this quarter, we plan on attending the Stephens Chicago Bank Conference and the Raymond James Chicago Bank Tour. With that, I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Alberto Paracchini (President)

Thank you, Brooks. Good morning, and welcome to Byline's first quarter earnings call. We appreciate all of you taking the time to join the call. With me this morning are Chairman Roberto Herencia, our CFO Tom Bell, and our Chief Credit Officer Mark Fucinato. In terms of the agenda for today, I'll start with highlights for the quarter, followed by Tom, who will walk you through the financials, and then I'll come back and wrap up with some comments before opening the call up for questions. As a reminder, you can find the deck on our website, and as always, please refer to the disclaimer at the front. Before we get started, I would like to pass the call on to Roberto for some comments. Roberto?

Roberto Herencia (Chairman)

Thank you, Alberto, and good morning, everyone. Before Alberto and the team go over the strong results for the first quarter and a solid start to 2024, I want to touch on a few items. Last week, Mike Scudder celebrated his retirement as Executive Chairman of Old National Bancorp, which was effective at the end of January. I want to acknowledge Mike for his combined 38 years of outstanding leadership and dedication to First Midwest and Old National, and his contributions outside of the bank to the Greater Chicago area. I've had the pleasure of competing and collaborating with Mike over the years, and today, we're both trustees at DePaul University, Mike's alma mater, and where he holds the board leadership position.

Mike was always kind enough to call when he was working on his strategic plans for First Midwest to seek input and insights, an unusual action from a competitor. Understated and not flashy, Mike is full of content, conviction, and leadership. Best to Mike and his family. In a testament to our unwavering commitment to strategic excellence, our team has once again delivered excellent results this quarter against our own internal measures, against our peer group and analysts' expectations. We surpassed $9 billion in total assets, and stockholder equity climbed above $1 billion. In fact, we have been delivering strong results consistently over the last few years, no matter the economic challenges, improving key profitability metrics from the median of the peer group to top quartile.

This consistency, a clearly improved performance in both absolute and relative terms, full transparency in our growth strategy, and a really good balance between the short-term rigor of the marketplace, your EPS number, and our long-term aspirations to become the preeminent commercial bank in Chicago, should be reflected in higher valuations. But we know the mindset. Some of the folks pick their narrative and just stay with it until they have no choice but to yield to performance. On our end, we will continue to educate and refine the messaging, addressing the foundations of our business segments and how it all comes together year after year, not only on a quarterly basis. We've built something special with considerable runway and optionality. We want the same quality in our analysts and investor base, whom we consider partners.

Because, as we have been saying, there will be significant opportunities in the Chicago marketplace. For investors willing to do the homework, we believe we offer a compelling proposition. With a proven track record of success, a clear runway ahead of us, and unwavering dedication to creating long-term value, we invite you to join us in this journey to becoming the preeminent commercial bank in Chicago. With that, it's my pleasure to pass the call back to Alberto.

Alberto Paracchini (President)

Thank you, Roberto. Now moving on to the results for the quarter on page three of the deck. Overall, we were very pleased with our performance for the first quarter. Byline had another strong quarter characterized by healthy loan and deposit growth, solid profitability, and stable asset quality. The results continue to highlight the strength of our diversified business model, the attractiveness of our franchise, and the disciplined execution of our strategy. For the quarter, Byline reported net income of $30.4 million and EPS of $0.70 per diluted share on revenue of $101 million. Results are inclusive of approximately $1 million in charges related to the consolidation of two branches. Diluted EPS for the quarter was two pennies higher than last quarter, and $0.06 or 9.4% higher on a year-on-year basis.

Profitability and return metrics continue to remain strong across the board. ROA came in at 136 basis points, while ROTCE remained solid at 15.9%. Pre-provision income was $47.2 million for the quarter, which translated into a strong pre-provision ROA of 210 basis points. This was the sixth consecutive quarter where the company had pre-provision ROA above 200 basis points. As I just mentioned, total revenue came in at $101 million, which was flat to the prior quarter, but up 11% on a year-on-year basis. Net interest income was $85.5 million, down marginally from the fourth quarter and up slightly if adjusted for the day count difference between quarters. Non-interest income was up 6.7% and drove the overall increase. Moving on to the balance sheet.

We experienced nice growth in both loans and deposits. Loans increased by approximately $100 million or 6% annualized and stood at $6.8 billion as of quarter end. We continue to see good business development activity, with originations coming in at $264 million, driven by our commercial banking sponsor and leasing businesses. Total deposits grew by $173 million or 9.7% annualized and stood at $7.4 billion as of quarter end. The strong growth in deposits is reflective of growth in commercial relationships and our ability to capture our fair share of money in motion in the marketplace. Deposit composition remained relatively stable for the period, but we continue to see migration of deposits to higher rate products, albeit at a slightly lower pace than last quarter.

Deposit costs increased by 12 basis points, but given the rate environment, competition for deposits, and the attractiveness of higher rate products, we continue to expect upward pressure on funding costs. The margin declined 8 basis points to 4%, driven by higher funding costs, offsetting the increase in asset yields. Tom will provide more color on this shortly, but the margin ex accretion and adjusted for the impact of a short-term investment opportunity declined by only 2 basis points to 3.8%. Non-interest income came in at $15.5 million, up 6.7% from last quarter. On an operating basis, adjusting for the impact of fair value marks on our servicing asset, our underlying non-interest income was up 3% quarter-over-quarter.

Expenses remained well managed at $53.8 million, and the cost to asset ratio was 240 basis points. This was 2 basis points lower than last quarter and 29 basis points lower on a year-on-year basis, highlighting the benefits to scale after the Inland transaction. Credit costs came in at $6.6 million and were inclusive of net charge-offs of $6.2 million or 37 basis points, with the resulting net reserve build driven by loan growth. Asset quality remained stable for the quarter, with NPLs increasing just 4 basis points to 100 basis points. Our ACL remained healthy at 1.51% of total loans.

Capital levels remained strong, with a CET ratio of 10.6%, total capital ratio of 13.7%, and TCE of 8.8%, all as of quarter end, consistent with our targeted TCE range of 8%-9%. With that, I would like to turn over the call to Tom, who will provide you more detail on our results.

Tom Bell (CFO)

Thank you, Alberto, and good morning, everyone. Starting with our loan and lease portfolio on slide four. Total loans and leases increased about $100 million or 6% annualized and stood at $6.8 billion at March 31st. We had strong origination activity for the quarter of $264 million, up 6% compared to a year ago. Payoff activity was slightly lower for the quarter, and utilization rates ticked up 2 basis points, driven by draws on existing construction projects. Loans, excluding CRE, increased across all lending categories, with the strongest growth coming from our leasing and commercial banking teams. We expect loan growth in the mid-single digits in the coming quarters. Turning to slide five. We drove another quarter of solid deposit growth, notwithstanding seasonal outflows and a $44 million reduction in broker deposits.

At quarter end, full deposits stood at $7.4 billion, up $173 million or 10% annualized. The growth was due to increases in time deposits and interest-bearing checking accounts, and we experienced growth both in average and end-of-period balances. The mix continues to moderate, as expected, with a decelerating pace linked quarter. DDAs as a percentage of total deposits was 25%, compared to 27% from the prior quarter. On a cycle-to-date basis, deposit betas grew at a slower pace, with total deposits at 47% and interest-bearing deposits at 63%. Turning to slide six. Net interest income was $85.5 million for Q1, down 1% from last quarter due to day count and in line with guidance.

Cumulatively, over the cycle, we have benefited from our asset sensitivity and earning asset growth, with NII growing at a 21% CAGR over the past two years. Moving forward, we are focused on reducing asset sensitivity further, primarily from on-balance sheet activities that may be supplemented with balance sheet hedges... Our NIM declined by 8 basis points to 4%. The margin was impacted by a short-term investment position we put on this quarter, whereby we invested $200 million and borrowed the funds from the Bank Term Funding facility. This generates roughly $245,000 in net interest income per quarter. The trade-off being a 6 basis point reduction in the margin. Accretion on acquired loans declined 4 basis points to 20 basis points this quarter, and we expect it to continue to gradually decline in future quarters.

Earning asset yields increased 5 basis points, driven by higher loan and investment yields. Market expectations for rate hits have materially changed since the start of the year. Based on the forward curves from mid-April, we estimate our net interest income for Q2 will be in the range of $83 million-$85 million. As a reminder, our goal is to maintain and grow our net interest income over various interest rate cycles. Turning to slide seven. Non-interest income stood at $15.5 million in the first quarter, up 7% linked quarter, primarily driven by a $1 million increase in other non-interest income due to an increase in derivatives and gain on sale of leased equipment. The balance of government-guaranteed loans sold decreased by $17 million in the first quarter compared to Q4.

The net average premium was 9.6%, higher than expected for Q1, primarily due to favorable market conditions and mix of loans sold. Going forward, we expect gain on sale income to be at a level consistent with Q1 results. Turning to slide eight. Our non-interest expense was well managed and came in at $53.8 million for the first quarter, flat from the prior quarter and in line with our Q1 guidance of $53 million-$55 million. During the quarter, we announced that we were consolidating two branch locations, which will occur in the second quarter. Our non-interest expense of $53.8 million includes branch consolidation charges of $1.3 million, of which $1.1 million is not included in our adjusted results.

Excluding the two branch closures, our core operating expenses were $52.5 million for the quarter. As a result of the closures, our expected annual cost save is approximately $1.1 million, beginning in the third quarter. Looking forward, we maintain our non-interest expense guidance of $53 million-$55 million. On a side note, since the first quarter of 2022, revenue growth has outstripped non-interest expense growth by five percentage points per year. Turning to slide nine. The allowance for credit losses at the end of Q1 was $102.4 million, up 1% from the end of the prior quarter. In Q1, we recorded a $6.6 million dollar provision for credit losses, compared to $7.2 million in Q4.

Net charge-offs were $6.2 million in the first quarter, compared to $12.2 million in the previous quarter. This was a 49% decrease linked quarter, primarily due to lower charge-offs in C&I and CRE. NPLs to total loans and leases increased by 4 basis points to 1% in Q1. If you look at the bottom left graph, you can see that NPLs were flat quarter-over-quarter when you exclude the government-guaranteed loans. NPAs to total assets decreased by 1 basis point to 73 basis points in Q1, and total delinquencies were $28.6 million on March 31st, down 21% linked quarter. Turning to slide 10. We are very pleased with the progress we have made these past two quarters, lowering our loan-to-deposit ratio to 92.5% or 85 basis points linked quarter.

This quarter, we also repaid ahead of plan $11.3 million of our holding company line of credit borrowing related to the Inland transaction, which provides us with $15 million of additional liquidity and lowers our borrowing costs. Moving on to capital on slide 11. Our capital levels continued to grow during the quarter, with our CET1 ratio increasing to 10.6%. Additionally, the TCE to TA ratio was 8.8%, and excluding the balance sheet trade, our TCE ratio would have been approximately 20 basis points higher. As a reminder, 99.9% of our securities are held and available for sale, and therefore, our HTM portfolio losses of $7,000 has no impact to our modified TCE ratio. Our liquidity and growing capital levels continue to provide us a strong foundation, which positions us well to grow our business.

With that, Alberto, back to you.

Alberto Paracchini (President)

Thank you, Tom. As far as our near-term outlook is concerned, we are positive about our ability to continue to grow the business in the current environment. We continue to see good deal flow and opportunities to increase the business organically. Our pipelines remain healthy, and importantly, we're starting to see the impact that banking teams hired in prior periods have on our results. To that end, we added two additional bankers this past quarter and remain on the lookout for opportunities to further add talented bankers to our franchise. The rate environment remains somewhat challenging for banks as we balance the dynamics of customer preferences, growth, profitability, and competition in the marketplace. That said, given the opportunity set available as we see it, we find the trade-off of adding attractive business and long-term relationships at a marginally higher funding cost in the short run acceptable.

Our long-term orientation, coupled with the necessary balance sheet and financial flexibility, positions us well to take advantage of opportunities and continue to increase the value of our franchise. Lastly, I'd like to congratulate and thank all our employees for supporting our customers and their contribution to our results this quarter. With that, operator, let's open the call up for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question, and please do ensure that you are unmuted locally. Our first question today comes from the line of David Long from Raymond James. Please go ahead. Your line is now open.

David Long (Managing Director of Equity Research)

Thank you. Good morning, everyone.

Alberto Paracchini (President)

Hey, good morning, Dave.

David Long (Managing Director of Equity Research)

Wanted to dig in a little bit more on the deposit side and deposit competition. You know, here in Chicago, I've been seeing some rates on savings accounts back approaching the mid-5% level again, and it looks like the competition's picked up maybe a little bit with the, the pickup in rates recently. You know, you kind of hinted at it, but is-- are you seeing more competition maybe than you did a few months ago? Has that changed? And then where is it coming from? Is it the larger regionals, the community banks? You know, where, where do you see most of that competition?

Tom Bell (CFO)

Sure. Hi, Dave. Good morning. Thanks for the question. Generally speaking, you know, we, we've seen actually competition, you know, start to lower rates a little bit. So, it's we are getting some market share, both from the large bank space and then some of the, you know, regionals, if you will. You know, the appetite, primarily just given the rate environment, is, you know, higher costs, right, both in CDs and money market accounts. And yes, it's still very competitive, but, you know, we're primarily getting, you know, stuff done in the 5% range or lower. And, and I would also add that, you know, just given the rate shock that happened last year and some of the liquidity events, that, you know, we're actually renewing CDs and other products at lower levels today than we did, you know, a year ago.

David Long (Managing Director of Equity Research)

Got it. Got it. Thank you for that color. And then I want to shift gears on the lending side of the equation. It sounds like you guys still have an appetite to lend. You're out in the marketplace bringing in some veteran bankers. You know, what are you seeing in the marketplace with your competitors? Are you seeing lighter competition? And what trends are you seeing on the spreads on your new underwritings?

Alberto Paracchini (President)

I think in general, I don't know that I'd necessarily say lighter competition, Dave. I think competition is always there, particularly in call it core, you know, businesses like commercial banking, there's always competition. I would say we are seeing, and I don't think this is this is surprising, particularly from larger regionals and super regionals, I think, you know, the risk-weighted asset diets, I think we've seen some effect of that, but it's line by line specifically. I don't know that there's anything, you know, that I would tell you the competitive dynamics have gotten easier. We still have strong competitors that we compete against on a daily basis. But that being said, to your second part of the question about spreads, I think spreads have remained pretty stable, you know, from last quarter.

Certainly, you know, I think in general, I think it's competitive, but not anything unusual that we're seeing today.

David Long (Managing Director of Equity Research)

Got it. Thank you, Alberto, and thanks, Tom, for the first part of the question.

Operator (participant)

Our next question today comes from the line of Terry McEvoy from Stephens Inc. Please go ahead. Your line is now open.

Terry McEvoy (Managing Director)

Thanks. First off, Roberto, very nice comments on life. Much, much appreciated there. Maybe start with a question for Tom. The net interest income outlook of $83 million-$85 million, the low end of that is the variance there, really the cost of funds? And I guess on that topic, cost of funds were up 14 basis points quarter-over-quarter. It did slow. Would you expect that trend to continue, just given some of the comments on deposit competition?

Tom Bell (CFO)

Yes, I think to your question, that we are seeing the cost of funds pace continue to slow here. As I mentioned earlier, that, you know, the renewal rates are coming in lower than the prior rates, so that's that is helping us. We're still getting some benefit on the earning asset repricing of just, you know, legacy loans repricing. But generally speaking, you know, given the loan growth and the demand for us to continue to kind of bring in more deposits, it's going to be more marginal cost of deposits, you know. You know, we're obviously always going to go after our DDA with our clients, but incrementally, we're going to be probably doing money market and CDs to off to complement and then try to bring them into the back of the book later on in the future.

Terry McEvoy (Managing Director)

Thanks for that, Tom. And then as a follow-up, I think you said Mark, Mark was in the room or available. Appreciate all the disclosures on office. Maybe if you have comments on the industrial warehouse and multifamily as well, just larger parts of the CRE portfolio, and if you could discuss trends that you're seeing within those two segments.

Mark Fucinato (Chief Credit Officer)

Hi, Terry. We haven't seen any real issues with our industrial portfolio or warehouses or multifamily for that matter. We, we're aware of what's going on in the market. The key will be, again, if we have loans that are maturing in that space, you know, LTVs and cash flows and rates, the usual equation will be, what we'll be working with our customers on. We haven't had any issues, in those particular asset classes at this point in time.

Terry McEvoy (Managing Director)

Sounds encouraging. I appreciate that. Thanks for taking my questions.

Alberto Paracchini (President)

You bet.

Operator (participant)

The next question today comes from the line of Nathan Race from Piper Sandler. Please go ahead. Your line is now open.

Nathan Race (Managing Director and Senior Research Analyst)

Yeah. Hi, guys. Good morning. Thanks for taking the questions.

Alberto Paracchini (President)

Morning, Nate.

Tom Bell (CFO)

Morning, Nate.

Nathan Race (Managing Director and Senior Research Analyst)

Question for Tom. Just on the leverage trade that you guys executed in the quarter, curious if you could just elaborate on the structure of that, how long you plan on keeping that on, and just how we should just think about that going forward?

Tom Bell (CFO)

Nate, good. Thank you. Hi. We are, you know, using that transaction. We borrowed from the Fed in the term facility, so it's based primarily on the borrowing cost versus what we can invest in. So we can pay the facility off at any time. It's a one-year transaction, so it will not stay on for more than a year, and it's all subject to our investment options. Currently, we're leaving the funds at the Fed. So as long as the transaction has a positive carry for us and creates NII, we'll keep the transaction on.

Alberto Paracchini (President)

Nate, to add to what Tom said, just think of that as really we just you know, obviously, we have a fair amount of flexibility in terms of, you know, our capital position, so we just looked at that as an opportunity to generate really some amount of net interest income, really with essentially zero risk. And as Tom said, I think we'll continue to do that until it's profitable. It has a maturity, though, of one year. So that's really the end date. But for us, that was just being opportunistic and generating some incremental net interest income.

Nathan Race (Managing Director and Senior Research Analyst)

Got it. Very helpful. And I assume that's factored the continuation of that trade's included in your guidance for NII in 2Q?

Tom Bell (CFO)

Yes.

Nathan Race (Managing Director and Senior Research Analyst)

Okay, great. Changing gears a little bit, just thinking about SBA credit quality going forward. You know, obviously, there was a prominent SBA lender that had some issues that was announced last yesterday, I believe. I noticed that your SBA-specific reserve came down a little bit quarter-over-quarter. So just curious what you're seeing across that portfolio today, and I understand you guys have de-risked that portfolio over the last several quarters. So just would love to hear an update in terms of what you're seeing in that portfolio that we can't necessarily glean from some of the disclosures.

Alberto Paracchini (President)

Yeah, Nate, I, and I'm sure Mark will jump in here as well, but I think to us, I think we've always looked at this business and been pretty consistent in understanding and knowing that this is, you know, a higher risk segment of our portfolio. I think we added additional disclosure. Hopefully, it was helpful to give you all some perspective in terms of how that business has been, the exposure that we have to that business over time, how it's come down. You know, and it's back in, you know, if we think back at 2016, it's come down from around 14.6% of loans to around 6.3% today.

That being said, I think over the last, you know, really since COVID, we've really been communicating that, you know, this is a part of our portfolio that, you know, you always have concerns about because you're dealing with borrowers that, you know, are essentially either inexperienced or, you know, they're newer borrowers, they don't have the track record, et cetera. And I think our reserving relative to that comment has been consistent, you know, over time. So we feel good about kind of where we are at this point.

I think to, to the comments made by, by that other institution, and I think those are comments that I think hopefully you, you can tell that we've been highlighting, for some time, and that, you know, yes, these are borrowers that coming out of COVID, you know, are likely going to experience some trouble, particularly given the fact that rates have gone up, you know, 500 basis points. That being said, the trend in that portfolio has been pretty stable. You know, but we'll continue to, you know, monitor and manage the business accordingly. Mark?

Mark Fucinato (Chief Credit Officer)

Every, every couple of weeks, we literally sit down and go through, you know, the delinquencies, upcoming events for the customers, any trends in specific, parts of the portfolio, what's going on in the workout credits. But again, as Alberto said, the biggest, I think, burden that they're facing is, I mean, a lot of these customers are paying interest rates three times what they were before rates started going up, and that's a, it's a heavy load for these smaller companies.

They don't have the balance sheets typically to work through that or the ability to put capital into a company. So it's a portfolio we monitor very carefully. But again, if you look back historically, you know, it kind of comes with the territory almost, that you're gonna have some issues in that portfolio from time to time. That's why we monitor it so closely. At basically, every two weeks, we're looking at that book.

Alberto Paracchini (President)

Hopefully, that answers-

Nathan Race (Managing Director and Senior Research Analyst)

Very helpful.

Alberto Paracchini (President)

That gives you some color, Nate, on that.

Nathan Race (Managing Director and Senior Research Analyst)

Yep. Yep, indeed. And then if I could just ask lastly, just in terms of capital deployment priorities, you know, I imagine you guys will be north of your 9% TCE target in pretty short order here. So just curious, in terms of what you're seeing from a acquisition opportunity perspective and, you know, if the M&A environment remains fairly difficult as it kind of stands today, how you're thinking about perhaps continuing with repurchases going forward?

Alberto Paracchini (President)

Yeah, I mean, it's something that when you think about the hierarchy, Nate, is first and foremost, you know, continue to support the growth in the core business. We're seeing some decent opportunities organically to grow the business. So first and foremost, we wanna have the flexibility to do that. Second, we wanna pay a consistent dividend over time. Third, would be, you know, M&A or other opportunities to grow inorganically. And then lastly, you have the value of looking at share repurchases. You know, to your question regarding M&A, I think it's a pretty quiet environment. That said, I think we're always, you know, having conversations and looking at potential things that may surface. So, in summary, I think that's the hierarchy. We just wanna always have the flexibility to be able to take advantage of opportunities as they come.

Nathan Race (Managing Director and Senior Research Analyst)

Okay, great. I appreciate all the color. Thank you, guys. Nice quarter.

Alberto Paracchini (President)

You bet.

Tom Bell (CFO)

Thanks, Nate.

Operator (participant)

The next question today comes from the line of Damon DelMonte from KBW. Please go ahead, your line is now open.

Damon DelMonte (Managing Director of Equity Research)

Hey, good morning, guys. Hope everybody's doing well today. Just curious, do you guys have a?

Alberto Paracchini (President)

Good morning.

Damon DelMonte (Managing Director of Equity Research)

Good morning. Do you guys have a projection for CRE maturities over the course of the next few quarters?

Alberto Paracchini (President)

Damon, we haven't disclosed, you know, specifically, but I would say generally speaking, I think if you look at our CRE, you know, office exposure is around $205 million. I would say probably, you know, 40% of that, or so, you know, really is a 2024 event, and we're pretty much well ahead of kind of where were those loans and what those maturities are. And the rest are just, I would say, sprinkled out in 2025, 2026, and beyond, without any real material concentration in any one year.

Damon DelMonte (Managing Director of Equity Research)

Got it. Okay. And is the kind of rate reset for those, have you guys done, like, internal background work to kind of stress out the borrowers to see how they would react to the, to the higher rates today and, and kind of game plan to take an appropriate action leading up to that?

Alberto Paracchini (President)

I think that's part and parcel to what Mark and his team and the business units do in monitoring the portfolio. So absolutely, Damon.

Damon DelMonte (Managing Director of Equity Research)

Okay, great. Thank you. And then just to circle back on the BTFP leverage that you put on, what was the total dollar amount of that, and what part of the quarter did it come on?

Tom Bell (CFO)

$200 million, and it came on in January.

Damon DelMonte (Managing Director of Equity Research)

Okay. So you have a full, full quarter impact here this quarter then. Okay.

Tom Bell (CFO)

Yes.

Damon DelMonte (Managing Director of Equity Research)

And then just lastly, you know, as we think about provisioning and, kind of charge-offs, I mean, you guys still feel like net charge-offs will still be in that, you know, call it 35-45 basis point range for the next few quarters, and provision should be supportive of that to maintain a relatively flat loan loss reserve. Is that a fair way to think about that?

Alberto Paracchini (President)

That's a fair way. I think obviously continuing on loan growth, in that regard also, Damon, and I think as we stated also, for the underlying business, I think we're comfortable with that statement. But as you know, we have some PCD loans. As we have opportunities to work those assets out, we will certainly highlight those. But, you know, if we had those are marked assets, and if we have an opportunity to get out of them at exit prices that make sense, we will look to take advantage of that. So I just that's just an additional caveat to your question.

Damon DelMonte (Managing Director of Equity Research)

Got it. Okay. Thank you. That's all that I had. Appreciate it. Thanks.

Operator (participant)

As a reminder, if you would like to ask a question, please do press star, followed by one on your telephone keypad. Our next question today comes from the line of Brian Martin from Janney Montgomery Scott. Please go ahead. Your line is now open.

Brian Martin (Director and Senior Equity Research Analyst)

Hey, good morning, guys. Nice quarter.

Alberto Paracchini (President)

Morning, Brian.

Brian Martin (Director and Senior Equity Research Analyst)

Hey, just maybe, one, just for maybe for Tom, maybe just big picture, you mentioned that you were, you may be taking some steps to reduce the asset sensitivity. And I think, you know, you had previously talked about maybe a $3 million number for 25 basis point cuts. Just kind of wondering how, you know, what, what you're planning to do on the, the potential to put some hedges down or reduce the sensitivity or just kind of if you can give us some thought on how you're thinking about that?

Tom Bell (CFO)

Yeah, sure, Brian. Thank you. I think couple things. One, you have to recognize that rates in the middle of the curve are up about 100 basis points. So, you know, we obviously weren't gonna do any hedges or in that lower rate environment. I think now it can make more sense. You know, we'll still have to see how the data comes out and what the Fed does here. But we're, you know, we're asset sensitive, so we've benefited from the rate up movement, and then we just think that, you know, we're trying to get, you know, well, I don't know that we'll ever get to neutral, but we'd love to be at, you know, at neutral at some point and just earn our spread and go home.

But, you know, in the deck on page six, we kind of have our sensitivity for rates down, and we've been able to bring down the sensitivity just from organic things we're doing on the balance sheet. And I think that's primarily our focus right now.

Brian Martin (Director and Senior Equity Research Analyst)

Okay. And I guess, specifically on the organic side, I guess, are there, you know, the actions you expect to maybe be able to reduce it by... You know, I guess, what specifically, is there anything you can talk about that you're planning to do that will lower that?

Tom Bell (CFO)

I mean, we brought it down about 1%, from the last quarter, and so obviously, our leasing business is doing very well. That's fixed-rate nature product. We like the spread on that transaction for us, and that's, you know, a short-term, you know, cash flow transaction, three years, typically. So that's one area. Obviously, any, you know, fixed-rate loans that we do, either in CRE or, you know, commercial, will help us as well. And then we obviously have the securities portfolio, the cash flows running off of that. I mean, securities investments, you know, is not a core business, but, you know, for liquidity reasons and also just given where spreads are, that looks more attractive today than it did, say, three months ago.

There's opportunities to at least for sure replace cash flows and, you know, potentially add to the position if needed.

Alberto Paracchini (President)

Yeah, I think-

Tom Bell (CFO)

Yeah.

Brian Martin (Director and Senior Equity Research Analyst)

Okay.

Alberto Paracchini (President)

Brian, to add to what Tom said there, I think generally it's really looking to take advantage to a degree that we can, that we can originate well-structured, rate-protected fixed-rate loans. I think we would look to do that, and that's really the primary tool on the balance sheet side.

Brian Martin (Director and Senior Equity Research Analyst)

Okay. And just curious, I mean, the mix of what you're originating today in terms of variable versus fixed, what's the proportion? Is it more variable and I guess, is that what we're at today, and you're shifting that?

Tom Bell (CFO)

Yeah, it was 70/30-ish, kind of, and we're moving towards more 50/50.

Brian Martin (Director and Senior Equity Research Analyst)

Gotcha. Okay. Perfect. Thanks for the color. And then maybe just one for Mark on, I guess, from a credit perspective, any change in the quarter from a criticized perspective or kind of a special mention credits? I know you talked about classified, but just any, it's not like there's much movement there, but just wanted to confirm that.

Mark Fucinato (Chief Credit Officer)

No, there hasn't been a lot of movement in the stats, whether it's criticized, classified, et cetera. It's been pretty flat. Obviously, we're hoping to do better.

Brian Martin (Director and Senior Equity Research Analyst)

Gotcha. Okay, and then maybe just one last one for Roberto. I guess just—I think you've, I don't know if you've talked about this recently, but just with getting to $9 billion and closing in on $10 billion, just kind of how you're thinking about that in terms of, you know, if and when you do consider... I think last quarter, you talked a little bit about the M&A being, you know, more interested. Just wondering how you're thinking about that in terms of the $10 billion threshold, and, is that a, is that a focus on, on potential targets you may be considering?

Alberto Paracchini (President)

I don't know that-

Roberto Herencia (Chairman)

You know-

Alberto Paracchini (President)

that we would say, Brian... Go ahead, Roberto. No, go ahead.

Roberto Herencia (Chairman)

Yeah. So, and feel free to chime in, but we, as you know, our strategy is organic focused, and obviously, we'll take it. Well, inorganic has always been part of the strategy, as long as it is within the parameters that we've described to you before. But we're gonna cross that $10 billion threshold, right? Organically, I mean, you can see it happening, right, in 2025. We're not going to change our M&A strategy because of the $10 billion threshold. And as we've shared with you previously, we're not a consumer-oriented bank, so the, you know, the impact from the interchange fee, while there is some impact, it's not what banks that have robust consumer businesses, you know, will be, right? It's gonna be a smaller impact on us.

So it, it's not the driver, right? We need to continue to execute on the organic opportunities that we have in front. Of course, we're, we're going to be smart about that $10 billion line, but it's, it really does not consume our, our thinking. We're much more focused on executing on our plans, and if there are some opportunities on the inorganic front that help us cross that threshold in a, you know, in a way that is more efficient, great. But if not, it, it is not. We're not, we're not worried about that, right? The opportunities will come when they come, and the $10 billion threshold is, is just a, a demarcation point. And having had the experience of crossing that before with other institutions, right?

We are focused on working internally and being prepared for the higher, you know, regulatory scrutiny that occurs after you've crossed $10 billion.

Brian Martin (Director and Senior Equity Research Analyst)

Gotcha.

Alberto Paracchini (President)

Well said.

Brian Martin (Director and Senior Equity Research Analyst)

Thank you for taking it. Yeah, well said. Thank you, Roberto, and thanks for taking the questions, guys. I appreciate it.

Alberto Paracchini (President)

You bet.

Operator (participant)

Thank you for your questions today. I will now turn the call back over to Mr. Alberto Paracchini for any closing remarks.

Alberto Paracchini (President)

Great. Thank you, operator, and we'd like to thank all of you for joining the call today, and I think that wraps up the call for this morning. Thank you.

Operator (participant)

This concludes today's call. Thank you all for your participation. You may now disconnect.