Earnings Call Transcript
BankUnited, Inc. (BKU)
Earnings Call Transcript - BKU Q4 2023
Susan Greenfield, Corporate Secretary
Thank you, Kevin. Good morning, and thank you for joining us today. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including without limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by external circumstances outside the company's direct control such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be considered 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. Good morning, everyone, and thank you for joining us for the earnings call. About nine months ago, right after March Madness, at the first quarter earnings, we laid out for you what our short-term strategic imperatives are. They can be summarized as improving the balance sheet and subsequently improving the P&L. Improving the balance sheet means, on the left side, we rely less on residential loans and bonds and focus more on C&I and CRE growth. On the right side of the balance sheet, we focus more on core funding and defending DDA. If we do all that, margin would expand, while keeping expenses in check and ensuring credit remains a priority, especially in uncertain times. Over the last couple of quarters, we outlined how we did against these stated goals. I’m happy to announce that the fourth quarter of 2023 was a continuation of that story. Deposits grew nicely by $426 million, despite this number including a couple of hundred million dollars from brokered deposits coming down. So, excluding brokered, our deposits grew by $604 million. NIDDA was down for seasonal adjustment, which literally happened in the last two to three days of the quarter. Average DDA was actually down by only $28 million, but period-end was down more. Wholesale funding came down as it did last quarter, including FHLB and brokered deposits. On the left side of the balance sheet, similar to last quarter, residential loans came down by $172 million, and bonds also decreased by $100 million, but we saw growth in our core segments, C&I and CRE. Initially, I thought the quarter could be flat for CRE, but it also saw growth. In total, between C&I and CRE, we grew by $476 million. On credit, all of this contributed to margin expansion again. The margin increased from 2.56% last quarter to 2.60%. If we keep this momentum, the margin will continue to expand. NPAs on the credit side ticked down from 40 basis points to 37 basis points, and when excluding SBA loans, it was at 25 basis points. NPAs are decreasing to a point where it will be harder to drive them down further, but charge-offs were at 9 basis points for the year, a significant improvement from last year's 22 basis points, if I recall correctly. We also built reserves again a bit this quarter; I mean the ACL, which stands at 82 basis points, up from 80 basis points last quarter. Criticized assets increased this quarter, as expected this time in the cycle. However, overall credit conditions remain strong, and I feel very comfortable about our position. Capital is robust, with CET1 now at 11.4% and TCE to TA at 7%. Unrealized losses in the securities portfolio improved by over $100 million, with AOCI net of tax improving by $50 million. Liquidity remains strong, and there are a couple of notable items in the P&L highlighted in the earnings release, including the $35 million FDIC assessment, which you all know about, and the sale of some railcars this quarter, leading to a $6.5 million charge. This step helps us avoid some expenses in coming quarters, as that $6.5 million figure is substantially less than expenses avoided from these sales. Now what are we witnessing in the marketplace? I would describe our current scenario as a soft landing where we're observing what we were once worried the Fed would struggle to realize, but it seems they may be achieving. In our mainstream operations, we're not witnessing a slowdown in either loan demand or margins nor any significant concerns regarding credit beyond the usual day-to-day issues. We're observing a decent economy, particularly in Florida, where we feel increasingly optimistic compared to three months ago. Looking to 2024 guidance, considering the current economic and rate environment, the strategy remains unchanged, focusing on enhancing both sides of the balance sheet as we've been doing over the last few quarters. We have finalized our planning for the year recently, projecting high single-digit growth in deposits, excluding brokers. The lending side, particularly in C&I and CRE, also anticipates high single-digit growth. Residential loans will likely continue to shrink, probably mirroring this year's decrease, give or take, while our focus remains on improving NIDDA, aiming to exceed 30% over time. Margins are expected to continuously improve, potentially experiencing a very slight change in Q1 but then steadily increasing throughout the year and into next year. Expenses will grow at a mid-single-digit rate. Should I have missed anything, feel free to add. Regarding capital, as expected, this topic will arise first, but for now, we will remain on the sidelines for share repurchases until we revisit it at the February board meeting. In the short-term, that's our stance, though the medium-term outlook may evolve, pending further developments. There will also be a dividend discussion in February, and I anticipate the board will respond positively. I'll now turn it over to Tom.
Thomas Cornish, Chief Operating Officer
Okay. Thanks, Raj. First off, I'll begin with some insights on the deposit side. As Raj mentioned, we increased deposits by $426 million in the quarter, with non-brokered total deposits climbing by $604 million when excluding the brokered segment. The overall pipeline for deposits continues to look very robust. Our near-term pipeline is about $1 billion, heavily dominated by operational deposits and NIDDA business, aligning with Raj's comments regarding the ongoing emphasis on this sector. This pipeline has remained strong for several quarters, and it looks very promising as we head into the first quarter of 2024. On the loan side, overall loans grew by $277 million for the quarter. Following Raj's strategic outline, residential loans declined by $172 million, while CRE was up by $77 million for the quarter, which we are pleased with. C&I growth across all segments, lines, geographies, and specialties surged by almost $400 million, specifically $399 million, showcasing an excellent quarter for us in the C&I domain. Moreover, the mortgage warehouse sector also saw a slight uptick as rates trended down, leading to increased activity on the residential side. As Raj pointed out, franchise equipment and municipal finance experienced modest declines, which we anticipate will continue into 2024. We are optimistic about the growth of core C&I and CRE this year. We are fortunate to be in strong markets and have exceptional talent in the right slices of geography including Florida, the Southeast, and our Dallas office. In many areas of the company, we are observing significant growth opportunities within C&I. Our pipeline in this sector remains extremely solid. Looking ahead, we continued to experience CRE growth for the year, positioning ourselves well from a CRE perspective as we advance further into the year. Given our overall figures, the CRE portfolio is relatively modest at 23.6% of total loans, and 13% of construction on total risk-based capital. We face plenty of future opportunities ahead. Though the current market conditions may be somewhat muted regarding rates, conversations with clients indicate potential opportunities, particularly as we approach the latter part of the year, especially for clients with capital at play. Now, on to the specifics of the CRE portfolio, further details can be found in Slides 12 through 14 of the supplemental deck, providing additional disclosures. The CRE portfolio remains modest at 23.6% of total loans, with a CRE to total risk-based capital ratio at 169%, significantly below regulatory guidance thresholds. As of December 31, the weighted average LTV of our CRE portfolio stood at 56%, with a weighted average debt service coverage ratio of 1.80%. Approximately 16% of the CRE portfolio is set to mature in the next 12 months, with about 8% maturing this year in fixed rates. Now moving to everyone's favorite topic: office. We have nearly $1.8 billion of office exposure, predominantly based in Florida. Within this total, just over $300 million is allocated to medical office buildings, which we believe will perform distinctly better compared to traditional office spaces across the nation. Our overall traditional office portfolio totals around $1.5 billion. During the quarter, we had payoffs totaling $88 million within the office portfolio, including our largest office loan transitioning to the CMBS market at year-end. Consequently, our total office exposure declined by $78 million this quarter, following a decrease of $30 million in Q3, amounting to a notable total decline of about $108 million within the last two quarters. Corresponding to previous quarters, the weighted average LTV concerning the office portfolio was 65%, whereas the weighted average debt service coverage ratio stood at 1.7% as of December 31. We have provided breakdowns of these numbers by geography on Slide 12. Substantially all of our portfolio is performing, with 92% in a pass rating as of December 31. Overall, the portfolio continues to thrive, characterized by strong sponsors supporting the underlying properties, generally with low basis in the assets. We do not foresee significant loss content arising from the office portfolio. Notably, 60% of the office portfolio resides in Florida, where demand and demographic trends remain generally favorable, and nearly all assets in the portfolio are situated in suburban regions. My experience during a visit in West Palm Beach last week aligns with these observations, where I discovered a private equity client in a bustling office building without any available parking spaces, a telling indicator of the office market's health in that specific region. Regarding the New York Tri-State portfolio, about 42% is in Manhattan, totaling roughly $180 million. This portfolio boasts a 96% occupancy rate and a 12-month lease rollover of just 3%. The remaining elements are distributed amongst Long Island and surrounding boroughs. Overall rent rollovers within the forthcoming 12 months constitute a small portion at 11%. Conclusively, $146 million in CRE office loans were rated below pass as of December 31, compared to $90 million at September 30, which translates to an increase of $56 million. The majority of this increase resulted from tenants vacating some spaces, placing temporary pressure on cash flows, alongside heightened insurance and interest rate costs. In the current office market landscape, we face a challenge: even when we can re-lease spaces, we sometimes encounter concessionary periods. Therefore, unless it’s a very short duration of 90 days or less, we count that cash flow from re-leases as potentially lost. We are navigating these challenges and working through various aspects. I will now turn it over to Leslie for additional details regarding the quarter.
Leslie Lunak, Chief Financial Officer
Okay. Thanks, Tom. Net income for the quarter reached $20.8 million or $0.27 per share, clearly impacted by the FDIC special assessment of $35.4 million pre-tax. We also sold or entered into agreements to sell some railcars at EFG, which amounted to a $6.5 million loss, contrasting a gain of $4.2 million from similar transactions in the prior quarter, indicating a significant $10 million swing in fee income quarter-over-quarter, predominantly due to these railcar sales. While there may be similar occurrences in the upcoming quarters, they are unlikely to net out to anything substantial overall, although they may fluctuate. The net margin was at 2.60% for this quarter compared to 2.56% in the last. The yield on earning assets increased from 5.52% to 5.70%, while the yield on securities rose from 5.48% to 5.73%, influenced by some coupon resets occurring, as several of these adjustments only take place quarterly or annually. We continue to see these coupon resets filtering through the portfolio, alongside some retrospective accounting adjustments. The yield on loans recorded an uptick from 5.54% to 5.69%. The cost of deposits rose by 22 basis points to 2.96%. To note, the recent 22 basis point increase in this quarter compares to a 28 basis point rise from last quarter, indicating a slowing rate of increase over recent quarters, which is promising. The average cost of FHLB advances remained relatively stable; however, the average balance dipped almost $500 million, contributing positively to our margin. Regarding 2024 outlook, following Raj's comments, we anticipate the NIM to expand overall, although Q1 may be relatively flat with slight up or down variations. It's important to highlight that the forecasted NIM expansion is primarily driven by the ongoing transformation of our balance sheet on both sides and does not depend significantly on potential Fed cuts. Our forecast accounts for four cuts throughout the year, one each quarter, but the effectiveness of those cuts on our balance sheet is only minor. Our prediction forecasts the NIM to reach the high 2s by the year's end, alongside a projected mid-single-digit increase in net interest income despite very modest balance sheet growth. The provision this quarter stood at $19 million, with the ACL-to-loan ratio rising from 80 to 82 basis points. The ratio of the ACL to non-performing loans increased to 160% from 143%. The primary factors influencing this quarter's provision comprised commercial production and the remixing of the portfolio, alongside an uptick in criticized and classified assets. A waterfall chart illustrating the factors responsible for the change in reserves is available in the deck. For 2024, we plan on building the ACL further as our portfolio composition transitions more toward commercial loans versus residential loans, realizing that commercial loans typically carry higher reserves. It's also worth mentioning that our pre-reserve rate stands almost three times our historical lifetime through-cycle loss rate. Although I understand that the current office scenario has its complexities compared to historical norms, this cushion is significant. On the topic of non-interest income and expenses, we've touched on the FDIC special assessment and the railcar sales. The rise in compensation costs relative to the previous quarter is encouraging as it reflects the repercussions of our stock price on the value of RSU and PSU awards, which we fully acknowledge. Beyond this, we do not perceive any notable concerns regarding non-interest income and expense. The effective tax rate (ETR) was low this quarter primarily stemming from state RTP true-ups, whose outsized effect was pronounced in this quarter due to the lowered pre-tax signings figure. Excluding discrete items, we expect the ETR for the upcoming year to hover around 25.5%. That’s all I have; back to you, Raj for any closing remarks you would like to make.
Raj Singh, Chairman, President and CEO
Given our recent progress after a challenging 2023, we find ourselves starting 2024 on a very positive note. The momentum we’ve built within the business syncs with the overall health of the economy, which, while it remains out of our control, significantly impacts our bottom line and gratitude. Consequently, I’m feeling quite optimistic as we enter 2024 – it’s a promising opportunity for our company. Feel free to ask any questions, Operator, we’re ready for Q&A.
Operator, Operator
Our first question comes from Will Jones with KBW.
Will Jones, Analyst
I wanted to revisit the margin guidance. The insight you provided about the margin benefiting more from the balance sheet composition rather than future rate changes was very helpful. However, regarding the loan side, which is currently undergoing changes, you've made significant progress on the deposit side. Is the improvement primarily coming from one aspect, or is it a combination of both? Yes, please proceed.
Raj Singh, Chairman, President and CEO
Yes, I mean, we can't precisely quantify the impact from each side, as both require work. The point Leslie made regarding the Fed movements corresponds to our base numbers, utilizing whatever the forward curve was, which was four cuts.
Leslie Lunak, Chief Financial Officer
When we reviewed the expansion seen over recent quarters, it has been primarily associated with funding mix. However, we’ve recently begun to gain momentum in core C&I and CRE growth. Therefore, both aspects are contributing going forward.
Will Jones, Analyst
Yes, obviously I think those slides are important. But just in terms of the loan remix you guys are doing rolling off Resi and adding on C&I and CRE, where do you see that trade-off in yields on the portfolio as you kind of roll off some lower-yielding stuff and then add on some of the newer loans?
Leslie Lunak, Chief Financial Officer
Today, the C&I increases are coming in around 8%, give or take slightly more. The Resi portfolio yields are in the mid-3s, indicating a significant pickup. Furthermore, we're observing wider spreads on new commercial production relative to commercial loans that are rolling off, even if they’re all variable rate products. Some differences stem from market conditions as we have shifted focus away from certain types of business towards more relationship-based business which tends to yield a bit wider.
Thomas Cornish, Chief Operating Officer
If you analyze our performance this year, every core lending group–corporate, commercial, small business, and CRE–finished the year with better internal spreads than they did in 2022. Our projections indicate incremental margin improvements across each of these lending teams.
Leslie Lunak, Chief Financial Officer
All that is ongoing.
Raj Singh, Chairman, President and CEO
And that's reflective of what the pipeline suggests. Perhaps spreads will revert at some point, but at present, we do not see that trend.
Will Jones, Analyst
Okay. That makes sense. Raj, I’ll ask because I feel like this is an important moment for you guys. There's considerable optimism regarding the margin trajectory by year-end. It appears as though you are somewhat tempering expense growth, thus could we expect to finally see some operating leverage materialize, particularly in the latter half of 2024?
Raj Singh, Chairman, President and CEO
In regard to expenses and operating leverage, I prefer to accomplish that through revenue growth instead of solely through expense reductions. We've undertaken a significant expense reduction initiative just prior to the pandemic, and I must emphasize that such measures cannot be taken repeatedly. Hence, we need to invest continuously in core and new markets that we’ve discussed over the past couple of years. The anticipated operating leverage will largely stem from margin expansion.
Will Jones, Analyst
Yes. Okay. That's great color. Last quick one for me. The gains and losses from selling operating lease equipment, is that standard for you? Or are those really more of a one-time occurrence?
Leslie Lunak, Chief Financial Officer
We aim to reduce non-core asset classes, so you should anticipate more of such transactions in the upcoming quarters. Although these will likely show some lumpiness, they should not net out to materially significant figures over the next year.
Will Jones, Analyst
So it's odds equal; that lease financing business maybe won't see much growth for the foreseeable future?
Leslie Lunak, Chief Financial Officer
No, it should shrink.
Raj Singh, Chairman, President and CEO
This segment has shrunk over the last three years, and that trend will continue. Growth will stem from our core business operations: C&I, CRE, and small business sectors, not from what we refer to as BMT, namely franchise finance and equipment finance, both of which we aim to reduce.
Thomas Cornish, Chief Operating Officer
If you look back three years ago, our UPB was $2 billion. Today, it's about $650 million.
Timur Braziler, Analyst
Looking at deposit beta assumptions. I'm just wondering what your expectations are here over the next couple of quarters, assuming no rate cuts in the immediate near term, how much additional creep is there on deposit betas over kind of 1Q, 2Q? And then I'm just curious as to what your expectation is for deposit betas on the way down? Will the competitive Florida market increase that lag effect on betas on the way down, or do you think Florida deposits will reprice similarly to what you might see elsewhere?
Leslie Lunak, Chief Financial Officer
At a high level, there’s a lot of granular modeling involved in this area. Thus far, the beta through the cycle has been about 54. We expect it will reach the high 50s by the time the repricing phase ceases. Regarding the regression once rates decline, we will be proactive in decreasing the cost of deposits, yet the marginal cost of new deposits will likely exceed that of the backbook rate which will affect the overall rollout.
Raj Singh, Chairman, President and CEO
We still have a significant quarter of CD repricing in the current quarter. After this, our CD maturity significantly drops as we progress through the year. Last quarter saw considerable volumes, and this quarter also features substantial amounts but very little in the second quarter and the remainder of the year.
Leslie Lunak, Chief Financial Officer
Yes, we agree. This CD repricing phenomenon partially explains our decision not to project margin expansion in the first quarter.
Timur Braziler, Analyst
Got it. That makes sense. Encouraging to hear that noninterest-bearing migration in 4Q was more seasonal in nature. I'm wondering, do you believe that the excess liquidity and risk of additional noninterest-bearing outflows is resolved now? If so, could you elaborate what seasonal factors influence these balances?
Raj Singh, Chairman, President and CEO
Yes, our title business has seen substantial growth, which we are pleased with, and is where most seasonality arises. This is closely linked with mortgage origination-related deposits, which follow a distinct seasonal pattern: weaker mid-month and mid-quarter, and stronger during month-end and quarter-end, except for year-end when activity diminishes. We have monitored this trend closely over the past three years, observing similar patterns last December compared to prior years.
Leslie Lunak, Chief Financial Officer
It's a regular phenomenon for year-end, accompanied by a noticeable drop in mortgage activity.
Timur Braziler, Analyst
Just a few questions regarding CRE. It seems that LTVs for office properties increased a bit in New York quarter-over-quarter. Can you discuss some recent reappraisals seen in New York, particularly Manhattan, and describe the current LTV progression?
Leslie Lunak, Chief Financial Officer
Some movement can be attributed to reappraisal. However, much of it is modeled because, when lacking new appraisal data, we implement commercial property forecasts at detailed sub-market levels, adjusting the LTV accordingly. Thus, both factors play a role.
Thomas Cornish, Chief Operating Officer
Regarding New York City, the majority focus is on Manhattan, where we have about 12 loans in total. Most maturities have been paid off, and we have not seen significant new appraisals. Anecdotal evidence indicates that valuations may have decreased by 20%, though this varies from building to building, influenced by occupancy rates, debt service coverage, and other characteristics.
Leslie Lunak, Chief Financial Officer
Nonetheless, the LTVs remain very strong, indicating there is considerable cushion in our portfolio.
Timur Braziler, Analyst
Lastly, concerning New York City multifamily, what portion, if any, is rent regulated, and how much is from the 2019 or earlier vintage?
Leslie Lunak, Chief Financial Officer
We currently hold $121 million in New York City rent-regulated exposure, which is insignificant at this point.
Thomas Cornish, Chief Operating Officer
Moreover, on the LTV topic in New York, it's crucial to consider the investor basis in the property as well. Many in our client base are longstanding generational owners who acquired these buildings at much lower valuations, which greatly influences their ability to support properties through temporary shifts in occupancy and debt service coverage ratios.
David Rochester, Analyst
Just to clarify on the expense guidance. Is that off of expenses excluding the FDIC special item, or is it including those? Excluding it, right?
Leslie Lunak, Chief Financial Officer
Yes, thank you for bringing that up.
David Rochester, Analyst
Okay, sure. I wanted to double check. The margin guidance sounded promising regarding the high 2s. Could you provide more specific parameters around it, as high 2s can depict a significant range?
Leslie Lunak, Chief Financial Officer
I'm somewhat hesitant to provide precise figures because numerous factors could sway that a few basis points in either direction. Hence, being overly specific could be misleading.
David Rochester, Analyst
Understood. We can focus on mid-singles for net interest income, then?
Leslie Lunak, Chief Financial Officer
Yes, that's correct.
David Rochester, Analyst
Regarding the railcar sales, it appears you may have more planned. Is the bulk of that asset class underwater now? Can you comment on that? Furthermore, what consequences can we expect for that income stream going forward? What might a reasonable run rate be as we move into the first quarter?
Leslie Lunak, Chief Financial Officer
While the fee income will decline, associated expenses will also decrease. Thus, when considering net figures, that will yield positive results. The depreciation of operating lease equipment will also diminish, along with other costs related to operating that business which are not transparently reflected in the P&L. This means that the fee income line will likely decrease, while net-net, it will improve the bottom line.
Raj Singh, Chairman, President and CEO
I concur with that sentiment.
David Rochester, Analyst
Right. In terms of magnitude, should we anticipate a cut to roughly half over this year or how are you envisioning that decline?
Leslie Lunak, Chief Financial Officer
The fee income may decrease, reaching around $0.8 million to $0.9 million per quarter.
David Rochester, Analyst
Got you. Lastly, while you have addressed the buybacks, considering positive loan growth, a favorable outlook on C&I and CRE, and a soft landing with contained credit trends, why not capitalize on the current discount to tangible book?
Raj Singh, Chairman, President and CEO
I may lean towards conservatism, but I still believe we need more time until previous experiences to reflect. There's a chance of economic slowdown, and I prefer to allocate that capital into loan growth directly. While we are not projecting total growth this year, next year looks more promising for us. Moreover, we are watching the bond portfolio closely; at some point this year, it will cease to shrink. Overall, we are preparing for balance sheet growth in the longer term, with uncertainties persisting in the system. Taking all this into account, I believe we should maintain our cautious approach in the short term. This topic will be revisited at every board meeting starting in February, suggesting it is on our agenda. My impression is that the discussion regarding buybacks will probably extend into the second half of the year, but provided we do reassess, modification of the position could arise.
Thomas Cornish, Chief Operating Officer
Just to clarify regarding the railcar question, it is not so much that these assets are underwater based on a residual or NLV type assessment. Instead, it’s about the necessity for future investment to maintain their attractiveness, which is not an avenue we want to pursue long-term. Thus, whenever opportunities arise, we’ll swiftly move out of these assets, accepting marginal gains or losses, as it aligns with our long-term strategy.
Operator, Operator
Our next question comes from John Arfstrom with RBC.
John Arfstrom, Analyst
Many of my questions have already been covered, but I do have a few more. How much more do you expect from the residential runoff? Raj, you mentioned it could remain similar. Therefore, should we anticipate a drop of around $1 billion?
Raj Singh, Chairman, President and CEO
I believe you should expect around $700 million to $800 million more this year. While we are not issuing precise guidance for next year, this trend is likely to persist. We are still over-allocated to residential loans despite their safety, as they do not yield adequate returns. Hence, looking ahead, we will continue observing similar dynamics as we have seen previously.
John Arfstrom, Analyst
Have you shared an optimal percentage for residential loans?
Raj Singh, Chairman, President and CEO
A benchmark we previously considered pre-pandemic would be around 20%. This suggests there is a path forward requiring a couple of years to revert back to that figure.
John Arfstrom, Analyst
You mentioned the desire to return NIDDA to over 30%. What strategies are you implementing to achieve this?
Raj Singh, Chairman, President and CEO
We previously surpassed 30% a couple of years ago under significantly different monetary conditions. To set a renewed target for the company, we seek to inspire our team to align with the objective of reaching 30%. This isn’t an enigmatic goal; if we were at 32% or 33%, it’s logical to strive for a return to a three-handle. We recognize there isn’t a perfectly elucidated strategy, but we have initiated robust tracking of our pipeline to ensure accountability. This pipeline reflects many opportunities, and that fosters my conviction that achieving this target is feasible. Although this might take a couple of years, it remains an objective we can achieve over time.
Thomas Cornish, Chief Operating Officer
Ultimately, our success hinges upon three critical factors: First, having the right talent in appropriate positions drives value at the client level, which encourages clients to switch from other banks to ours. Secondly, maintaining concentration on market segments known for driving significant deposit levels is vital. Lastly, it comes down to relentless focus on execution.
Raj Singh, Chairman, President and CEO
You need to identify lucrative sectors aligned with where the funds will be flowing, understanding the challenges unique to those industries, and work on rectifying those pain points through innovative technology and processes. Ultimately, it requires multiyear efforts for realization. Yet, once you find success, it can create barriers for others attempting to replicate. This has been the foundation of our business growth, and we are actively developing initiatives that remain undisclosed at this time as they are still in the early stages of development.
Thomas Cornish, Chief Operating Officer
If you're a football fan, let's aim for four yards at a time every day.
John Arfstrom, Analyst
Understood. The second slide particularly illustrates a significant economic forecast impact on reserves, yet your better economic outlook yields a somewhat different risk migration in specific reserves. Is this indicative of a mix transition, or does it reflect true risk migration? How material is this forecasted build going forward amidst these compositional changes?
Leslie Lunak, Chief Financial Officer
Yes. The current trends observed this quarter relate closely to our increased criticized/classified outlook and additional specific reserves set, though the materiality does not call for detailed elaboration. We expect some normalization of credit dynamics; however, we should be cognizant of potential build costs due to shifts in loan composition as we transition more toward commercial loans versus residential, especially given the inherent risk attributes between these classes.
Raj Singh, Chairman, President and CEO
Additionally, the current situation encompasses the shift as we roll off residential loans and increase C&I exposures.
Leslie Lunak, Chief Financial Officer
Provided everything remains constant, without other variables adjusting, reserves will rise due to compositional shifts since C&I loans carry a heightened risk profile compared to residential. Currently, we have a 1.53% reserve on C&I and only 0.09% on residential loans.
Thomas Cornish, Chief Operating Officer
It’s essential to underscore that we enforce a well-conceived risk rating approach. We assess loans based on their current state rather than speculating where they will be in the future. If an asset loses a tenant but has a new lease agreement established with a qualified company, it doesn’t change how we rate it during the interim period. We maintain a rigorously conservative approach to our risk assessments.
Operator, Operator
Our next question comes from Ben Gerlinger with Citi.
Ben Gerlinger, Analyst
Just to circle back, I know we’ve discussed a lot of guidance and ranges. I just wanted to confirm that I had everything correct. Mid-single digits on NII expenses, mid-single-digit growth promises core numbers, approximately $600 million for the full year 2023. Lease finance should be running roughly around $9 million per quarter, correct?
Leslie Lunak, Chief Financial Officer
In general, that is the framework you should consider.
Ben Gerlinger, Analyst
Is it fair to consider it around 20% or 21% on a normalized basis?
Leslie Lunak, Chief Financial Officer
I can't confirm that specific figure right now.
Ben Gerlinger, Analyst
While you're making strides in lending, is possible you're introducing credit risk? Is there a significant variance between your lending practices, or does your competitive advantage dissipate if more lenders come into play?
Raj Singh, Chairman, President and CEO
The primary factor influencing current spreads stems from the Federal Reserve's actions to reduce liquidity in the market, leading to increased costs of borrowing. While we ensure that we maintain credit quality in our lending practices, current spreads increased not from credit risk but due to constrained overall liquidity caused by market dynamics.
Ben Gerlinger, Analyst
Understood. Shifting focus onto cost management, how are expenses projected to trend throughout 2024? Can you clarify expectations for peak expense levels quarter-to-quarter, particularly in the latter part of the year?
Leslie Lunak, Chief Financial Officer
We typically refrain from allocating specific quarter-by-quarter guidance as various expenses will hit the P&L based on timing. The first quarter tends to show a slight uptick in payroll expense due to frontend-loaded payroll taxes and 401(k) contributions. Beyond that, we don’t place significant focus on it either.
Operator, Operator
Our next question comes from Steven Alexopoulos with J.P. Morgan.
Alex Lau, Analyst
This is Alex Lau on behalf of Steve. Regarding the margin, how much did CD repricing contribute to the NIM in the fourth quarter? What should we expect moving into the first quarter? Additionally, could you share the old CD rates that are expiring and the new rates coming in?
Leslie Lunak, Chief Financial Officer
I don’t have exact figures on that for Q4, but I know we have a substantial amount of CD maturities coming due in Q1, averaging about $1 billion, which will likely reprice higher by about 50 basis points.
Raj Singh, Chairman, President and CEO
Regarding new money rates, we recently adjusted our deposit rates. Currently, the 12-month CD pricing sits at 4.5%, with a 9-month promo rate at 5%, and this has been stable for several weeks.
Alex Lau, Analyst
Can you please elaborate on your deposit growth sources, mentioning specific segments or industries contributing to the $600 million non-brokered deposits for this quarter? What is the average rate for these new deposits, and how much of this growth is attributed to new DDA?
Thomas Cornish, Chief Operating Officer
The deposit growth spans across all business lines, with contributions from nearly all segments. I can’t provide a breakdown by industry or segment at this moment, but our pipeline reflects numerous opportunities across various business units.
Alex Lau, Analyst
How transparent are your conversion rates for treasury deposits in Q4? Has this ability improved as customers feel more comfortable shifting balances since the March madness period nearly a year ago?
Thomas Cornish, Chief Operating Officer
While we monitor our pipeline closely, our pull-through rates upon reaching the proposal stage are quite high, historically around the 80% mark. Pre-proposal, rates tend to be less reliable, but once we reach discussions about proposals, they hold a strong conversion rate.
Raj Singh, Chairman, President and CEO
A member of our team has just informed me that our current rate for a 12-month CD stands at 4.5%. Our promotional 9-month CD is pegged at 5%. This has been consistent for the last several weeks.
Leslie Lunak, Chief Financial Officer
We don't prioritize the efficiency ratio but focus primarily on expenses relative to assets. Our guidance for expenses indicates a mid-single-digit increase, without devoting excessive attention to the efficiency ratio itself, as experience shows that various factors influence it.
Operator, Operator
Our next question comes from Zach Westerlind with UBS.
Zach Westerlind, Analyst
This is Zack on behalf of Brody. I have a couple of quick inquiries regarding the margin. The securities yield has seen promising increases lately. Could you clarify what’s driving this trend and what trajectory we should expect moving forward?
Leslie Lunak, Chief Financial Officer
The primary driver for the increase in yields is linked to rising coupon rates, which have nearly peaked. Thus, I anticipate a potential downturn in yields, especially with the possibility of upcoming rate cuts.
Zach Westerlind, Analyst
My final question is regarding the deposit cost at the 420 spot rate. How do you envision that shifting during the first half of the year?
Leslie Lunak, Chief Financial Officer
I anticipate the next quarter will see an increase, particularly with CD repricing still active, and there have been no rate cuts. Assuming the forward curve predictions hold true, we may observe a decrease during the latter half of the year, perhaps starting from the second quarter.
Operator, Operator
I'm not showing any further questions at this time. I'd like to turn the call back over to Raj for any closing remarks.
Raj Singh, Chairman, President and CEO
To conclude, following a challenging 2023, we are starting 2024 on a very positive note. The business is gaining momentum in areas we have strived diligently to improve, along with favorable economic conditions that impact our outcomes positively. Consequently, I harbor significant optimism regarding what 2024 holds for us. While there remains considerable work ahead, our dedicated team is eager and prepared to continue building throughout the year. Thank you for your participation. Should you have further questions, don’t hesitate to reach out to either Leslie or myself. We look forward to our next engagement in three months. Thank you, and goodbye.
Operator, Operator
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.