Q1 2024 Byline Bancorp Inc Earnings Call

Participants

Brooks Rennie; Vice President, Investor Relations Director; Byline Bancorp Inc

Alberto Paracchini; Executive Vice President and Head of Planning and Development of Midwest Bank; Byline Bancorp Inc (Pre-Reincorporation)

Roberto Herencia; Board Member; Byline Bancorp Inc (Pre-Reincorporation)

Thomas Abraham; President of Byline's Small Business Capital; Byline Bancorp Inc

David Long; Analyst; Raymond James

Terry McEvoy; Analyst; Stephens, Inc.

Nathan Race; Analyst; Piper Sandler

Damon DelMonte; Analyst; KBW

Brian Martin; Analyst; Janney Montgomery Scott

Presentation

Operator

Good morning and welcome to the Byline Bancorp First Quarter 2020 for earnings call. My name is Bailey, and I will be your conference operator today. (Operator Instructions) Please note the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp speaking, please go ahead.

Brooks Rennie

Thank you, Bailey.
Good morning, everyone, and welcome to byline Bancorp's First Quarter 2024 earnings conference call. In accordance with Regulation FD. This call is being recorded and is available via webcast, our Investor Relations website, along with our earnings release and the corresponding presentation slides as part of today's call, management may make certain statements that constitute projections, beliefs or other forward-looking statements regarding future events or the future financial performance of the Company.
We caution that such statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed. The company's risk factors are disclosed and discussed in its SEC filings in addition, our remarks and slides may reference or contain certain non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. Reconciliation of each non-GAAP financial measure to be to the comparable GAAP financial measures can be found within the appendix of the earnings release. For additional information about risks, uncertainties, please see the forward-looking statement and 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 Martini, President of Byline Bancorp.

Alberto Paracchini

Thank you, Brooks. Good morning and welcome to byline First Quarter Earnings Call. We appreciate all of you taking the time to join the call with me this morning are Chairman Roberto, her NCR, our CFO, Tom Bell, and our Chief Credit Officer, and Mark who scenario.
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

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 wanted 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 all 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 were both trustees at the Paul university Mike's Alma matter and where he holds the Board leadership position. Mike was always kind enough to call when he was working on his strategic plans for us for First Midwest to seek input and insights and unusual action from a competitor understated and not flashing Micrus, 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 stockholders' equity climbed above EUR1 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 that 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 of Chicago should be reflected in higher valuations.
But we know the mindset, some of the folks take 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 home.
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 bankers, Chicago.
With that, my pleasure to pass the call back to Alberto.

Alberto Paracchini

Thank you, Roberto. And now moving on to the results for the quarter on page 3 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 by line reported net income of $30.4 million and EPS of $0.7 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%. Pretax pre-provision income was $47.2 million for the quarter which translated into a strong pretax, pre-provision ROA of 210 basis points. This was the sixth consecutive quarter where the company had pretax 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 noninterest income was up 6.7% and drove the overall increase.
Moving onto 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 and 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 eight 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 adjusted for the impact of our short-term investment opportunity declined by only two basis points to 3.8%.
Noninterest 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 in our servicing asset, our underlying non-interest income was up 3% quarter on quarter. Expenses remain well managed at $53.8 million and the cost to asset ratio was 240 basis points. This was two 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 four basis points to 100 basis points. Our ACL remained healthy at 1.11 0.51% of total loans. Capital levels remain 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% to 9%.
And with that, I would like to turn over the call to Tom, who will provide you more detail on our results.

Thomas Abraham

Thank you, Alberto. And good morning, everyone. Starting with our loan and lease portfolio on Slide 4. 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 two 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 5. 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 6. 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 NI 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 name declined by eight 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 six basis point reduction in the margin. Accretion on acquired loans declined four basis points to 20 basis points this quarter, and we expect it to continue to gradually decline in future quarters.
Earning asset yields increased five basis points, driven by higher loan and investment yields. Market expectations for recast 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 to $85 million. As a reminder, our goal is to maintain and grow our net interest income over various interest rate cycles.
Turning to Slide 7. Noninterest income stood at $15.5 million in the first quarter up 7% linked quarter, primarily driven by $1 million increase in other noninterest 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. So going forward, we expect gain on sale income to be at a level consistent with Q1 results.
Turning to slide 8, our noninterest 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 to $55 million. During the quarter, we announced that we were consolidating two branch locations, which will occur in the second quarter. Our noninterest 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 saves approximately $1.1 million beginning in the third quarter.
Looking forward, we maintain our noninterest expense guidance of $53 million to $55 million.
On a side note, since the first quarter of 2022, revenue growth has outstripped managed expense growth by five percentage points per year.
Turning to slide 9, 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 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 four 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 one 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. It 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 TC 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

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 costs 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.

Question and Answer Session

Operator

(Operator Instructions) David Long, Raymond James.

David Long

Thank you. Good morning, everyone. Stayed one where today again, a little bit more wanted to dig in a little bit more on the deposit side and deposit competition on here in Chicago. I've been seeing some rates on savings accounts back approaching the mid 5% level. Again, it looks like the competition has picked up maybe a little bit with their the pickup in rates recently.
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 Bank? Where do you see most of that competition?

Thomas Abraham

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

David Long

Got it. Got it. Thank you for for that color. And then I wanted 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. What are you seeing in the marketplace with your competitors as are you seeing some wider competition? Are you already? And what trends are you seeing on the spreads on your new underwriting?

Alberto Paracchini

I think in general, I don't I don't know that I'd necessarily say lighter competition, Dave. I think competition is always there particularly and and call it core 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 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 that I would tell you the competitive dynamics have gotten easier on we still have strong competitors that we compete against on a daily basis. But that being said to your to your second part of the question about spreads, I think spreads have remained pretty stable from last quarter. And certainly, I think in general, I think it's competitive, but not not anything unusual that we're seeing today.

Operator

Terry McEvoy, Stephens, Inc.

Terry McEvoy

Thanks. First off, Roberto, very nice comments on life, but much appreciated there. Tom, maybe start with a question for Tom. The net interest income outlook of $83 million to $85 million on the low end of that or 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 on?

Thomas Abraham

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

Terry McEvoy

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

Thomas Abraham

Hi, Gary. We haven't seen any real issues with our industrial portfolio or warehouses. Our multi-family for that matter. We were 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. Visual equation will be we'll be working with our customers that we haven't had any issues in those particular asset classes point in time.

Operator

Nathan Race, Piper Sandler.

Nathan Race

Yes, hi, guys. Good morning. Thanks for taking the questions on Enablex NAV, a question for Tom, just on the leverage trade that you guys in the quarter, curious if you could just elaborate on the structure that how long you plan on keeping that on. And I'm just how we should think about that going forward.

Thomas Abraham

I would need good. Thank you. Hi. We are using that transaction we borrow from the Fed and 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. And so it will not stand for more than a year. And it's all subject to our investment options. And currently, we're leaving the funds at the Fed. So as long as the transaction has a positive carry for us and creates NI, we'll keep matching that.

Alberto Paracchini

Nate, to add to what, Alex, I just think of that as really we just obviously, we have a fair amount of flexibility in terms of our capital position. So we just I've 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, while you're here. So that's really the end date. But for us, that was just being opportunistic and generating some some incremental net interest income.

Nathan Race

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

Thomas Abraham

Yes.

Nathan Race

Great to hear a little bit on just thinking about SBA credit quality going forward. Obviously, there was a prominent SBA lender on that some issues that was announced last yesterday, I believe, and I noticed that your SDA 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 it derisks our 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

Yes, 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 we've been pretty consistent and understanding and knowing that this is a higher risk segment of our portfolio. I think we added additional disclosure, hopefully was helpful to give you 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 in the back end. 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 year, really since COVID, we've I've really been communicating that this is a part of our portfolio that you always have concerns about because you're dealing with borrowers that are essentially either experience or, you know, their newer borrowers, they don't have the track record, et cetera. And I think our reserving relative to that comment has been consistent over time.
So we feel good about kind of where we are at this point, I think 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 are likely going to experience some trouble, particularly given the fact that rates have gone up 500 basis points. That being said, the trend in that portfolio has been pretty stable, but we'll continue to monitor and manage the business accordingly.

Nathan Race

Mark, every every couple of weeks we literally sit down and go through the delinquencies, upcoming events for the customers any trends in specific parts of the portfolio? What's going out of the workout credits. But again, it's Alberto said that the biggest, I think, burden that they're facing is that the largest customers are paying interest rates, three times what they were before rates started going up.
And that's a heavy load for the smaller companies. They don't have the balance sheets typically that to work through that have the ability to put capital into a company. So it's a it's a portfolio we monitor very carefully. But again, if you look back historically it's kind of comes with the territory. Almost you're going to have some issues in that portfolio from time to time. And that's why we monitored so closely at basically every two weeks. We're looking at that book. I'm sorry that I don't know if that gives you some color on that.

Alberto Paracchini

Yes, yes, indeed on. And then if I could just ask lastly, just in terms of capital deployment priorities. Yes, 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 an acquisition opportunity perspective and the M&A environment remains fairly difficult as it kind of stands today. How you're thinking about perhaps continuing with us repurchases going forward Yes.
I mean, it's something that when you think about the hierarchy on Navitas, first and foremost is continuing to support the growth in the core business, we're seeing some and some decent opportunities organically to grow the business. So first and foremost, we want to we want to have the flexibility to do that. Second, we want to pay a consistent dividend overtime third would be M&A or are there other opportunities to grow inorganically?
And then lastly, you have the value of looking at share repurchase. As you know, to your question regarding M&A I think it's a it's a pretty quiet environment. That said, I think we're always we're having conversations and looking at potential things that may serve us. So I think we in summary. I think that's the hierarchy. We just want to always have the flexibility to be able to take advantage of of opportunities as they as they come.

Operator

Damon DelMonte, KBW.

Damon DelMonte

Hey, morning, guys. Have everybody's doing well today. I'm just curious, you guys have already on a projection morning. Do you guys have a projection for CRE maturities over the course of the next few quarters?

Alberto Paracchini

Damon, I we haven't disclosed specifically, but I would say generally speaking, I think if you look at our out, our CRE office exposure is around $205 million, I would say probably 40% of that or so, you know, it 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

Got it. Okay. And is the kind of the 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 higher rates today and and kind of game plan to take an appropriate action leading up to that.

Alberto Paracchini

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

Damon DelMonte

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 in what period or part of the quarter?

Thomas Abraham

Did it come on $200 million and it came on in January.

Damon DelMonte

Okay. So you have a full four quarter impact here this quarter then. Okay. And then just lastly, as we think about provisioning and kind of charge-offs means you guys still feel like net charge-offs will still be in that, call it 35 to 45 basis point range for the next few quarters. And provisions should be supportive of that to maintain a relatively flat loan loss reserve. Is that a fair way to think about that?

Alberto Paracchini

That's a fair way. I think obviously, contingent 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 on. But as you know, we have some PCD loans as we have opportunities to work those assets out. We will certainly highlight those. But if we had those are marked assets and if we have an opportunity to get out of them at exit prices. That makes sense. We will look to take advantage of that. So I just that's just an additional caveat to your question.

Operator

(Operator Instructions) Brian Martin, Janney Montgomery Scott.

Brian Martin

Hey, good morning, guys. Nice quarter supporting, Brian. Okay. Just maybe one just for maybe for Tom, maybe big picture. You mentioned that you were maybe taking some steps to reduce the asset sensitivity. And I think you had previously talked about maybe $3 million number for 25 basis point cuts. Just kind of wondering how you what you're planning to do on the C and the potential to put some hedges that reduce the sensitivity or just kind of if you can give us some thought how you're thinking about that?

Thomas Abraham

Yes, sure, Brian. Thank you. And I think couple of things. One, you have to recognize that rates in the middle of the curve are up about 100 basis points. So we obviously weren't going to do any hedges or in that lower rate environment.
I think now it can make more sense. 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 benefited from the rate of movement. And we just think that we're trying to get I don't know that we'll ever get to neutral, but we'd love to be at it neutral at some point and just earn our spread and go home.
But in the deck on Page 6, 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

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

Thomas Abraham

And then we brought it down about 1% from the last quarter. And so obviously, our leasing business is doing very well. That fixed rate nature product. We'd like to spread on that transaction for us, and that's a short term cash flow transaction three years typically. So that's one area.
Obviously, any fixed rate loans that we do either in CRE or in all commercial, it will help us as well. And then we obviously have the securities portfolio cash flows running off of that. I mean securities investments. We know it's 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. So there's opportunities to at least for sure, replace cash flows and potentially add to the position if needed?

Alberto Paracchini

Yes, I think yes, Brian, to add to what 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 on the balance sheet side.

Brian Martin

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 should guess is that with that today and you're shifting that?

Thomas Abraham

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

Brian Martin

Okay, perfect. Thanks for the color. And then maybe just one for Mark and I guess from a credit perspective, any change in the quarter from a criticized perspective or any kind of special mention credits? And you talked about classifieds as a second, like there was much movement there, but just wanted to confirm that.

Thomas Abraham

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

Brian Martin

Got it. Okay. And then maybe just one last and Roberto, I guess just I think you've talked about this recently, but just with getting the $9 billion in a closing in on $10 billion, just kind of how you're thinking about that in terms of if and when you do consider, I think last quarter you talked a little bit about the M&A being more interested. I'm just wondering how you're thinking about that in terms of the $10 billion threshold? And how is that it is that a focus and potential targets you may be considering?

Alberto Paracchini

I don't know of anything that we would say, Ryan, go ahead referred to. No, go ahead.

Roberto Herencia

Yes. So And feel free to chime in. But Jake, we as you know, our strategy has organic focused and obviously, we'll take it. 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 going to cross that $10 billion threshold, right organically. I mean, you can see it happening right in 2025. I 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 so the the impact from the interchange fee, while there is some impact, it's not what banks that have robust consumer businesses in oh two will be right. It's going to be a smaller impact on us. So 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 going to be smart about at that $10 billion line, but is it's 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 way that is more efficient Great.
But if not, 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 demarcation point and having had the experience of crossing that before with other institutions, right? We we are focused on working internally and being prepared for the hire no regulatory scrutiny that occurs after you cross $10 billion.

Operator

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

Alberto Paracchini

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

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