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spk05: Ladies and gentlemen, thank you for standing by, and welcome to the Bank Unite third quarter earnings conference call. At this time, all participants are on a listen-only mode. After this week's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press the Start and the 1 key on your touch-tone telephone. Please be advised, today's conference is being recorded. If you require other assistance, please press Start and 0. I would now like to hand the conference over to your speaker host today, Susan Greenfield, Corporate Secretary of Bank United. Please go ahead.
spk06: Thank you, Livia. Good morning, and thank you for joining us today on our third quarter results conference call. On the call this morning are Raj Singh, our Chairman, President, and CEO, Leslie Lunak, our Chief Financial Officer, and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflects the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including, without limitations, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by the COVID-19 pandemic. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2020, 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.
spk14: Thank you, Susan. Welcome, everyone. Thank you for joining us for our earnings call. Let me make a quick few remarks about what we're seeing in our markets before we get into our results. Three months ago when we met you on this call, Delta was beginning to surge. Florida seemed to be caught up in it more than probably any other state, and there was a lot of concern as to whether that will impact the economy and to what extent. I'm happy to report three months into it, now Delta seems fairly in the rear view mirror. I checked the numbers just a few minutes before this call. I think they've come down to even lower than they were three months back. So we're happy about that. But what we're most happy about is also that it did not actually have the same kind of impact that previous surges have had on the economy. I think the economy is learning to live with these surges as and when they happen. Hopefully there won't be any more. but at least over the last three months we did not see a significant impact to the local economy here or in other parts of the country where we do business. But it's good to see Delta behind us, obviously with a fair amount of pain that everyone took on the healthcare side. The Delta surge did put our plans about return to office on hold a little bit. We had started bringing people back in in the summer. We had to take a pause. Later today, I will be making a call internally and we will be talking about how we're going to restructure that process. Our expectation is that by January, first week of January, we will be in the new normal. And between now and then, slowly start bringing people back. We're going to start that, believe it or not, even for board meetings. We've not had an in-person board meeting since the start of the pandemic. Yesterday, the board met telephonically and decided it was time to, you know, to It will be over two days in the middle of November, so I'm excited about that too. Overall, the economy here in Florida is doing well. There are obviously widespread labor shortages and supply chain disruptions that everyone has talked about. We are seeing that. Our customers are feeling it. Indirectly, we're feeling that as well. It's hard for me to say when those will resolve themselves, but that is the challenge that we're dealing with. look at this, you know, the biggest economic crisis of our lifetime that we went through, if 18 months into it, if all we're dealing with is supply chain issues and labor shortages, I think that's a pretty good place to be. This could happen a lot worse. So I take this as actually a victory that, you know, these are the issues. This could happen a lot worse. So I'm thankful for, you know, where we are and how this pandemic is being resolved. Quickly getting into our quarter, we posted net income of $87 million and 94 cents a share. This compares to $104 million we posted last quarter, which was $1.11 per share. The annualized returns so far for the nine months so far are return on equities, 12.4%, and return on assets of 109. Net interest income declined slightly to 195 from 198 last quarter, but it was up compared to the third quarter of last year, which I think at that time it was $188 million. NIM contracted to $233 from $237, mostly because of lower asset yields and less than expected commercial loan growth. Also, less PPP impact this quarter versus last quarter was also a large reason for that contraction of NIM. Cost of deposits, as we've been telling you, The company used to come down. We dropped the 20 basis points this quarter. It was 25 last quarter, so five basis points reduction in cost of deposits. On a spot basis, we were actually at 19 basis points. And I checked last night, we're down another basis point, so about 18 basis points as of yesterday. So the story on the deposit side continues. We also had decent growth in deposits, especially DDA, non-trust DDA. meaningfully, you know, we're not trying to grow the balance sheet. Growing the balance sheet and hanging things up in liquidity does not really create value for anyone. Instead, this quarter, we decided not to grow the balance sheet. We shrank it free of capital and bought back stock, you know, quite strongly. In fact, one of the things the board did yesterday when we met, is approved another $150 million buyback given that we are going to wind down the authorization that we have based on how quickly we bought stock this quarter. Also, the fact that the stock was around $40 or so makes it very easy. From my perspective, given where our book value is, we're trading at such a low multiple, it's so easy. much of rocket science to figure out that it's a good buy. So we've been aggressive and we've been buying back and we've gone through much of the authorization. Loans, total loans, excluding P2P runoff, they grew by $74 million. Residential business remained strong, as has been the case the last several quarters. Commercial segments, the payoffs outpaced production. On the production side, actually, we were pretty happy Our production, you know, we tried to go back and said, okay, let's see what we were doing pre-pandemic, and we compared the production this quarter to the third quarter of 2019. Now, production was actually higher this quarter, but it's two things that we can't control, one being payoffs and the other line utilization. Those have been disappointing this quarter, which is why it all adds up to only about $74 million of growth in the long portfolio. What else? Credit. I would say nothing but good news on the credit front. I know these days credit is not on people's mind. It should always be on everyone's mind. That's the primary risk we take as a bank. So I'm happy to report on the credit front, credit size classified assets declined by $240 million, loans that are on temporary deferral or modified. under the CARES Act, also declined to $285 million. They were $497, I believe, at the end of last quarter, so almost cut in half. NPL ratio also got better. It was $121 this quarter. Last quarter, it was $128. By the way, that includes the guaranteed portion of the SBA loan, so if you exclude that, NPL ratio is actually 99 basis points. The $69 million large commercial loan that we spoke to you about last quarter, the resolution of that is moving forward. We're pretty happy with how we reserve for it and feel very comfortable in that level of reserve. Net charge-offs annualized was 19 basis points last year. I think we were at about 26 basis points, so good news on the net charge-off front as well. Capital book value has grown to $34.39. Tangible is at $33.53. And of course, as of September 30th, we had $58 million left in the share buyback, but we're adding another $150 to that. Going forward, in terms of buybacks, again, we will remain opportunistic given the volatility in the stock market, and we'll continue to execute on that. Before I hand this over to Tom, let me say what are the top things in my mind in terms of what we're trying to achieve in the short to medium term. Basically, low growth. but not reaching for long growth as in getting caught up in that and going outside of a risk spot. That's not acceptable, but long growth, restarting the growth engine on the left side of the balance sheet is a top priority. Continued improvement of deposits. While we've made a lot of progress on that, I think there's more work to be done there, especially in light of the fact that eventually rates will rise. maybe nine months, maybe less, maybe a little more, but away from a rising rate environment that we have to be ready for, and we're basically working on our deposit business to do just that. In the very short term, it's return to office safely is another priority, and then launching in new markets. The new markets that we talked about last time to you, we don't really have much to share yet because it's not very ready for prime time, but we have been working for the last three months on finalizing, and hopefully over the course of the next three months, we will make some announcements and launch one or two new markets. With that, I will turn it over to Tom, who will get a little deeper into the numbers before Leslie.
spk12: Great, Raj. Thank you. So I wanted to spend a little time first on deposits, give you a little bit more detail and perspective on some of the things that were working on and what we achieved in the quarter. So as Rod said, average non-interest-bearing deposits grew by $749 million for the quarter and $2.7 billion compared to the third quarter of 2020. Period end non-interest-bearing DDA grew by $324 million, while total deposits shrank by $493 million. So we break down a little bit the $324 million of NIDDA growth For the quarter, it was, again, broad spread across all geographies, across all business units, and very heavily focused on new client acquisition. I'd also spend a little bit of time working on the deposit portfolio, the work that Raj is talking about. It's been a daily level of bruising work that's not that glamorous, but we're working you know, very hard on new account operating relationships, cross-selling within the book, ensuring that ECR rates are set at appropriate levels, really, you know, working hard on kind of the building blocks of this. And I think the two places that you see it, number one are the continued NIDDA growth, obviously, in the $324 million, but also secondarily, if you look at service charges, deposit fees on accounts was up 33% for this quarter compared to the same period last year. So we're really starting to see excellent kind of cadence and rhythm in both continued NIDDA growth, continued opening of new operating account business, which is really our central focus as a strategy, and continuing sort of surging in the level of service charge revenue that we have from these accounts. So all of that is a big part of what Raj talks about when we're talking about the entire deposit mix and the quality of the deposit book. A little further down, money market accounts declined by 1.1 billion this quarter as we continue to execute the strategy of the quality of the base. We have looked hard at accounts that we think are highly susceptible to increases in rates once we get into a different interest rate environment. And we've taken a lot of steps to ensure that we're moving out deposit accounts right now on a proactive basis as we continue to grow the operating account business and take advantage of that entire dynamic to have just an overall better quality book. Switching to the loan side, as Raj said, excluding PPP loans, the total portfolio grew by $74 million in the third quarter. Residential continued to be strong, reflecting the strength of the housing market and the rate environment. The overall resi portfolio grew by $751 million for the quarter. Of that, the EBO segment was $50 million, and the pure residential correspondent portfolio grew by $701 million. In the mortgage warehousing business, which has also benefited from a strong housing market, there we saw a decline of $141 million for the quarter. Most of that is starting to see some normalization in this segment as refi activity begins to moderate, and we see a little bit lower line utilization in this area, although we continue to be interested in growing commitments and expect our commitment book to grow in the short term. For the C&I business, it was up $13 million for the quarter, including owner-occupied CRE loans, and I'll talk a little bit more about what we see in that segment in just a second. The remaining commercial portfolio declined for the quarter. The largest decline was in Crete, including multifamily, which was down by an aggregate of $317 million for the quarter. The New York multifamily portfolio, which you all have been following now with us for a number of years, declined by $76 million for the quarter, but at this point we believe that that's stabilizing. That's the lowest level of runoff that we have seen you know, in a number of quarters, and we're actually starting to see some positives in the multifamily market, you know, in New York. I'm sure you all have followed that, you know, we're starting to see rent increases in the market. We're starting to see people return back to the New York City multifamily market. Schools are reopening and things are happening that are driving people returning to the city. There's been an awful lot of data out in the last couple of months about, you rent levels, even with concessions, improving back to sort of pre-pandemic levels. And we are looking at new opportunities now in the multifamily space within the New York market. So we're feeling better. We're feeling good about the portfolio we have today at the current level that it's at, and we're feeling better about the short-term growth opportunities within multifamily in New York. I'd land a little bit more on Roger's comments about... When we looked at production across the commercial lines, especially the C&I, Cree, and small business areas, it was better than pre-pandemic levels for the same quarter. We are seeing a reasonable return of pipeline, particularly in the C&I area where we have a large pipeline heading into the fourth quarter and the first quarter of next year. So we're seeing clients investing more. We're still fighting through kind of low utilization rates. And even really the accounts that we're bringing on from an NIDDA perspective that have lines of credit with them, even those lines are coming in at pretty low utilization rates. But we think ultimately that patients will pay off for us. And as people start making more CapEx expenditures and growing more solidly in 2022, we believe these relationships including the existing ones we have, we'll start to see improvements in these areas. But actually, overall, production and pipeline build, we feel pretty optimistic about right now heading into the fourth quarter and heading into 2022.
spk14: Yeah, line utilization, you know, bottomed out in the first quarter. It started to improve all through the second quarter, so we were pretty optimistic because we were seeing a very steady trend of improvement. But in the third quarter, it really stagnated. So it hasn't gone down, but it really hasn't come beyond where it was in the second quarter. And to Tom's point, from the new business that we're writing, the line business, it comes on, the utilization level, especially in that new business, is very low, lower than the existing book as well. So it's all dry powder, so when these bottlenecks in the economy are resolved, this should create growth, but it's hard for me now, but that's sort of what we're seeing. Leslie.
spk11: Tom, you were done. I'm sorry. I was going to give you the PPP update. As for PPP, $159 million of the first draw PPP loans were forgiven in Q3.
spk07: As of September 30th, there was a total of $49 million
spk12: in PPP loans outstanding under the first draw program and $283 million of outstanding under the second draw program. We expect to open the forgiveness portal for the second draw program next month, but obviously this is kind of winding down at this point. A quick update on deferrals and CARE Act modifications. Slide 16 in the supplemental deck also provides more detail on this. For commercial, no commercial loans were on short-term deferral. As of September 30th, $244 million of commercial loans remained on modified terms under the CARES Act compared to $436 million at June 30th. The largest decline in loans modified under the CARES Act was $144 million decline in the hotel portfolio. The hotel portfolio, particularly in Florida, continues to rebound. And if you've tried to get a hotel in certain areas of Florida, Lately, good luck, particularly in the Keys and other coastal properties. The occupancy has really returned strongly there, so we're feeling good to see that change come about. To date, $414 million in commercial loans have rolled off modification. 100% of these loans have either paid off or resumed regular payments. From a residential perspective, excluding the Jenny Mae early buyout portfolio, $40 million of loans remained on short-term deferral or have been modified under the Longer Term CARES Act prepayment plan at September the 30th. Of the 533 million in residential loans that were granted an initial payment deferral, 493 million or 92% have rolled off. Of those that have rolled off, 95% have been paid or are making regular payments. I think the last thing I'd say on the loan portfolio is also when we look at the $74 million in growth, keep in mind that We had $175 million of payoffs in criticized and classified loans. So while it certainly impacted the loan growth number, you know, it did contribute to the overall improvement in the credit quality, and we're happy to see that. So with that, I'll turn it over to Leslie.
spk07: Great. Thanks, Tom. Give a little bit more detail on the numbers for the quarter. starting with the NIM. The NIM did decline this quarter to 233 from 237. The PPP fee recognition had a bigger impact on the NIM last quarter than it did this quarter. If we factor out the impact of PPP fees and the impact of increasing prepayment speeds on some of our securities, the NIM actually would have been flat quarter over quarter. Loan growth was ready this quarter, not commercial. Had we seen more Commercial growth as opposed to residential growth, we likely would have seen some uptick in that map. The yield on loans decreased to 345 from 359 last quarter. Recognition of PPP fees, the differential in that quarter over quarter, if it hadn't been for that, the yield on loans would have declined by only six basis points for the quarter. And most of that six basis points really was attributable to the shift from commercial to residential, sorry. Eventually, obviously, we believe that pendulum will swing back the other way. I know you're going to ask me, so I'll answer you now. There's still $8.1 million worth of deferred fees on PPP loans remaining to be recognized. Almost all of that $8 million relates to the second draw program, so I don't really think we'll see much of that in the fourth quarter. Yield on securities declined from 156 to 149. and accelerated prepayments, which we think someday has to come to an end, but keeps not coming to an end. It just keeps getting faster. Mortgage-backed securities accounted for almost all of that quarterly decline in yield. Total cost of deposits declined by five basis points quarter over quarter. The cost of interest-bearing deposits down six basis points. Our best Expectation right now is that NIM would remain relatively stable over the fourth quarter, but obviously there are things that contribute to that that are a little bit difficult for us to predict. But that's our best expectation as of now.
spk13: And we can comfortably say the cost of deposits will continue to drop for at least two more quarters.
spk07: Yes. With respect to the allowance and the provision, overall the provision for credit losses for the quarter was a recovery of $11.8 million. Slides 9 through 11 of our deck provide further details on the ACL. The ACL declined from 77 basis points to 70 basis points over the course of the quarter. Most significant drivers of that change, a $2.3 million decrease related to the economic forecast. This is becoming less impactful than it has been in prior quarters, which is not surprising as things start to stabilize. A $4.5 million decrease due to charge-offs. Another 3.7 due to a variety of changes in the portfolio, including the mix of new production and exits, the further shift to loan segments with lower expected loss rates, primarily residential, impact on PDs of improving borrower financial performance, risk rating changes, et cetera. and a $5.9 million decrease in the amount of qualitative overlays, and this is mainly just a shift, things that are now being captured by the models that last quarter we didn't think the models were adequately capturing. The largest component of the reduction in the reserve was the CREE portfolio. The CREE model is particularly sensitive to unemployment, which improved this quarter, and the commercial property forecast also improved. particularly for retail and multifamily, where we saw improving forecasted vacancy rates. There was also a reduction in criticized classified CRE loans, which impacts the reserve. We also saw the RESI reserve come down. This was caused by residential loans continuing to come off deferral and resuming payments, and changes in the economic forecast related to unemployment and long-term interest rates also had an impact. I'll remind you that almost 25% of the resi book is government insured and actually carries no reserve. CNI reserves actually picked up a little bit as a percentage of loans this quarter. With respect to risk rating migration, you can see some details on this in slides 23 through 25 of our deck. The total criticized and classified commercial loans declined by $240 million this quarter. Most of that was in the substandard accruing category, which declined by 252. Special mention ticked up a little and substandard non-accruing ticked down a little. Total non-performing loans decreased to $277 million this quarter from $293 million at June 30th. The declines in criticized and classified assets really occur across pretty much all portfolio segments with the largest decline in CRE. Looking at other income and expense, there's not really anything material to call out this quarter. On a year-to-date basis, we had initially guided to mid-single-digit increase in non-interest expense, and that still looks like where we're likely going to land by the end of the year. And I would also note the 33% year-over-year increase in deposit service charges and fees, which Tom mentioned, and we're pretty happy about that. ETR was a little lower this quarter, mainly due to a temporary reduction in the Florida tax rate. Last point I'll make, you'll see in the next couple of weeks we'll be filing an S3, a shelf registration. Don't read anything into that so you all don't feel like you need to call me. Our shelf registration is expiring and we just want to have an active shelf on files. We're not planning anything. But you'll see that. And I'll turn it back over to Raj for any closing remarks.
spk14: No, I'll turn it over for Q&A. Okay. Let's jump into it.
spk05: Ladies and gentlemen, if you'd like to ask a question on the phone line, please press the star, then the one key on your touch-tone telephone. To remove yourself from the queue at any time, press the pound key. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Ben Gerling with Hovde Group. Your line is open.
spk04: Hey, good morning, everyone.
spk05: Good morning, Ben.
spk04: I was wondering if we could start on loan growth in general. It was great color and commentary from the opening remarks. I was curious if you guys could take a minute to kind of just walk through the competitive aspects of the markets you're working in. It seems like some competitors are doing a little bit stronger loan growth, but kind of just backing into the math, they're probably doing it at a lower rate. So with the payoffs you're seeing and the line utilization somewhat plateauing recently, are there areas of kind of low-hanging fruit that we should expect to see in terms of growth and kind of the dynamics you're working through? And then any update on the potential liftouts and more granularity would be helpful.
spk14: Sure. In terms of production, as Tom said, you know, if you just look at growth production levels, we were pretty happy with where the quarter came out. The only place where we're not active and, you know, very – deliberately pulled back are areas that are still impacted by the pandemic. So we're still not, for example, leaning into hospitality or areas such as, you know, even office on the CRE front. But everything else, small business, corporate, commercial business, and other aspects of CRE, warehouse, industrial, multifamily, we are seeing pretty decent production. But we're seeing an enormous amount of chaos. Just, you know, it just doesn't end. So all of that adds up to the numbers that you see. Where we're seeing inordinate competition from a rate and structure, I would say it's LIFOs that are doing very long-dated IOs, going out 10 and 15 years, that we refuse to compete in that space. That has been, it's always been out there, but I think it's gotten very pronounced in the last few months. Very long-dated, 10-, 15-year paper, interest-only, and I just don't think that fits our risk appetite.
spk12: I would probably add, when we use the word payoff, I would spend a little bit of time talking about what payoffs mean, and largely payoffs for us are not clients that are leaving to go to a different bank. their clients that are selling their companies, particularly within the CNI book. I mean, the level of M&A activity right now is just incredibly strong, and it's not only deep in larger businesses. You know, typically a couple of years ago, you would not see significant M&A activity in kind of your commercial, you know, lending businesses, and commercial I would describe as being kind of a $10 million to $50 million deal. sales company, we see significant activity M&A-wise even in that segment. So the private equity push has been very significant in terms of what it means within our portfolio and how it's increased speeds. Raj is completely accurate on what we're seeing in the real estate space as it relates to life goes and debt funds and others. CMBS, the agencies coming in at, you know, terms and conditions and fixed rates and debt yields that are just really not bank deals. I mean, these are deals for different kinds of companies that have different cost of funding and stability streams of funding to be able to support that. There's not, in the markets that we're in, I wouldn't say there's any low hanging fruit. We're in competitive places. and it's sort of a daily fight to do well. There are certain aspects that we're trying to focus on a little bit more going forward, certain spaces that we see. We have added a fair number of producers in the last quarter. We have several offers out this quarter, and so reinforcing our teams both in the markets that we're in and in the expansion markets that we're thinking about is a big part of the strategy.
spk04: Yeah, okay. That's a helpful color. I appreciate that. And then, Raj, just thinking kind of the bigger picture, I would consider you to be kind of a top-tier steward of capital. You have great leadership you're taking for the longer term. So kind of everything you said of the strong production, payoffs are going to come and go, but they're really a little bit out of control of the bank. You seem to have a pretty good handle on credit. Your margin is... that sensitivity should be a little bit helpful as rates do increase. So given where the stock is today, why not do something more aggressive in terms of a share repurchase? I understand that you did a pretty sizable one in the third quarter, but what's preventing kind of making hay when the sun's out in terms of the current valuation today of doing something more aggressive, potentially even a Dutch stock?
spk14: I don't have the exact numbers in front of me, but give or take $150 million, which is 5% of our capital, we bought back in less than a quarter. I'd say we were fairly aggressive. The quarter before that, stock was at an all-time high, and we sacked that one out. Plus, we were also trying to see, will loan growth come back or not? You know, our philosophy on stock buybacks before the pandemic used to be, we'll just do a little bit every day. We're not going to worry about exactly what the stock price is. This year has been a little different. We have been more opportunistic, more leaning into it when stock is lower and backing away when it's higher, because I just see a lot of volatility even now for the next several months. I think there will be ups and downs. Nothing to do with us, just the market, right? One piece of bad news. from Dr. Fauci or from somebody else, and you can have big movements in the stock market. So we will use that to our advantage. We're doing, you know, we're authorizing another $150 million between those two authorizations and what we started the year with, which was another roughly $40 million. That's a lot of stock in a year, and we'll keep doing more. And, you know, it's not like we're going down. You saw a balance sheet shrink $400 million this quarter, So until we see, you know, line utilization come back and growth, you know, squarely in front of us, you know, we'll continue on this strategy. We have a fairly good amount of room here given our capital position, which is so strong.
spk04: Okay, great. I appreciate it. I'll stop back in the queue.
spk14: Somebody just waved to me and said it's $130 million is what you want for the quarter. So I was rounding the numbers there. Not quite $150, but $130.
spk05: Our next question coming from the line of Dave Rochester with Compass Point. Your line is open.
spk09: Hey, good morning, guys.
spk01: Hey, Dave. Good morning.
spk09: Back on the buyback topic, you just mentioned, Raj, you'll keep doing more beyond this buyback. I was just curious, as you're looking at your excess capital position, how much do you think you've got in excess? Because you'll be growing loans hopefully faster next year. Just curious how you're thinking about that.
spk07: You know, Dave, we're kind of in the thick of our capital planning process for next year right now, and I'm going to defer providing specific guidance around that, I think, until our next call. I don't want to throw numbers out there preliminarily while we're in the thick of that process. But you're right. We do appreciate the fact that there's a lot of capital and there's room to go.
spk09: Yep.
spk07: We're not done.
spk09: No, I guess just given where the stock is, and I think you already mentioned this, if we're in the low 40s for at least, you know, a good part of the quarter, maybe not that long, but it would seem like you would continue that, not necessarily aggressive, but being active in the buyback.
spk14: Yeah. Is that a fair option? Yeah. If the stock stays where it was, you know, it has been for the last three months, we will continue to buy.
spk09: Yeah.
spk14: If it goes up to $51 like it was the previous quarter, we'll probably pull back a little. We'll trade it a little bit.
spk09: That all makes sense. Maybe switching to loans, it was good to see some net growth there, X the PPP. It sounded like you're done on the New York City multifamily runoff going forward. You mentioned some positive dynamics there. Are you guys thinking that maybe you could see some growth in that book here, or are you thinking that just stabilizes And then can you just give an update on some of the other areas where you've mentioned runoff expectations? I know you've seen some runoff on bridge for a while. Are you good on that in the next quarter or so? Or do you think that runoff looks into the next year?
spk12: Yeah, let me take each piece of that. So I think we're good at where we are in the New York multifamily portfolio right now. We're encouraged by the underlying trends with people coming back to the city, especially coming back into free market type property. We have pipeline for that product in Q4. So we're expecting to do new loans in that segment in the fourth quarter. So I would expect that it will stabilize and there's a better outlook for that asset class and that geography over the course of the next couple of quarters. As it relates to bridge, bridge I would, I'd break into two separate components. One would be the equipment finance business and obviously the second would be the franchise business. So the franchise business was part of our fairly significant focus. on asset improvement. We did see some parts of the franchise business, particularly fitness, went through some real challenges in the COVID process. We did reduce the portfolio within fitness reasonably significantly, and we probably will continue to do that, especially in one concept. But the numbers at this point aren't as large as they were when we first went into it. we've actually done some new franchise lending in the last 90 days. We're centering our strategy around what we think are the higher performing concepts, better delivery models, better pickup models in that segment. And we did actually a fairly large loan this quarter. We funded it in that segment. So we do see you know, opportunities within the franchise segment. I think within the equipment finance segment, it's a bit more challenging. I don't see as much runoff going forward, but when you look at that segment, the competition within the leasing business is extremely robust for CapEx schedules, and it's difficult. We saw some investment grade. opportunities this week for seven year fixed rate loans at 1% that the market, you know, gobbled up. So, you know, while the credit was certainly good, uh, you know, we took a pass. I mean, we just don't see a great risk reward return, you know, in that segment right now. And given where the interest rate scenario is, you know, one of the things that we're trying to be careful about is, buying into very long-term fixed-rate loans at a very low level now that could come back to bite us as rates head up. So the equipment finance business, I'd be a bit less optimistic in simply because just the return dynamics are not very good in that business.
spk09: Yeah. Okay. I appreciate all the color there. Maybe switching to deposits real quick. As you're trying to figure out what's maybe hotter money and what's not, how much more do you think you have to run off or that you want to move out at this point? And when do you think you'll get back to growing the book again?
spk14: Listen, I define growth in the book as growth in BDA, not in total deposits. So this quarter we had a total deposit decline of $493 million, but I don't think that is an issue at all. That doesn't drive profitability necessarily. DDA grew $324 million. On average, DDA actually grew a lot more because, you know, what was it? So we're growing deposits that matter. It's hard for me to give you a number and what we want to chase out, but there is still, you know, there are some large depositors. We also want to lower the average ticket size of the relationship. So a lot of the growth that we're focusing on and we're paying our people for is really smaller ticket growth. That doesn't create big numbers quarter over quarter, but it creates longer-term value that's far more important for us than just large $30, $40, $50 million accounts. So I'll take more consistent slow growth that will stick with the bank for 10 and 20 years, then take big quick growth that won't. So what you're seeing is that internal change in the deposit portfolio. It's hard to tell that from the outside, but inside we're laser focused on that. Bringing down average relationship size deeper cross-sell, paying more for more cross-sold accounts. So even within DDA, there's a difference between DDA, you know, relationship one and relationship two, and we're distinguishing that and we're paying people differently. So it's, like I said, you know, on the surface, it looks like our job is done. We're at 33% DDA total deposits and cost of funds now in the teens, but I know that internally we still have more work to do. It may not change those ratios that much, It may not even move the cost of funds down that much, but it will improve the deposit franchise for the long term.
spk09: All right. Great. Thanks for all the color.
spk05: Our next question coming from the line of Stephen Alex Paul with J.P. Morgan. Your line is open.
spk03: Steve, you might be unmuted.
spk12: I think we lost him.
spk03: Yeah, we have lost him. Let's go to the next caller.
spk05: Our next question coming from the line of Brady Galey with KBW. Your line is open.
spk11: Hey, thanks. Good morning, guys. Good morning. Good morning.
spk06: Good morning, Brady.
spk11: Another one on loan growth, not necessarily near-term. But, Raj, when you look at Bank United, when you look at the markets you're in, especially there in Florida, over the next three or four years or kind of longer term, what do you think is an appropriate growth rate to consider for Bank United?
spk14: I think... If you look backwards in our history, there was a time when we were growing 25%, 28% a year. I don't think we ever returned to that level. I don't think that's appropriate for a lending institution to grow. But at the same time, if I look at what is a 75th percentile level of growth, it probably is low double digits, give or take 10%. that would be an appropriate level, but that's generally made up of lots of highs and lows, because there is no normal in any one time, right? We're living through a weird time right now, and we may be living through, you know, something very different a year from now. But if you were to just, for modeling purposes, long-term, think about it, I would say, you know, that feels kind of right, 10%, 11%, 12%, close. But that is an approximation and an average of what can be a lot of lows and highs.
spk11: All right. And then, Raj, I know you guys are not ready to talk about any new markets that you're expanding into, but can you just help us think about how big of a splash that's going to be? When you go into a new market, will it be notably EPS dilutive? with an earn back of a year or two? How big of a splash do you think you're going to make when you do decide which market to go into?
spk14: Brady, we've entered new markets in the past. New York was sort of the exception because it was just very unique. But when we entered Orlando or Jacksonville or even some of the newer businesses, that may not be a new market, but when we did Pinnacle or we did the warehouse business or pick any one of them, I don't think... it materially impacts the bottom line for the first 12 months, up or down. Because we don't try to jump in and start doing hundreds of millions of dollars right off the bat. We take a more measured approach at least for the first full year because usually the team is new. You're trying to build them into your culture. You're trying to get comfortable with them, and they're trying to get comfortable with you. And generally we go through one whole year cycle before we start to put it In three or four years, it will definitely be meaningful to the bottom line, but in 12 months, it's not. We never have had the rent strategy or anything. It's always been make some investments. Some of them will pan out, some won't. We also don't want to do anything which will just be a distraction for the long term and never really add anything to the bottom line. There are ideas like that that come up which we swat away because we don't want to get distracted by something in five years will be $300 million. That's also a waste of our time and resources. But anything we do, the goal will be that over time it will be successfully measured in billions of dollars, but not in the first 12 months.
spk11: All right, that's fair. And then the last question for me is on the PPP fees recognized in the quarter. I think last quarter it was $4 million. It was $4 million. I think this quarter you said it was down a little bit. What was the amount of fees recognized?
spk07: It was less than $1 million, Brady. I think around $800,000. Okay. Yeah.
spk11: Great. Thank you, guys. Thanks, Brady.
spk05: And next question coming from the line of David Bishop with Seaport Research. Your line is open.
spk02: Yeah, good morning. Hey, just a quick question. With the build and the residential mortgage this quarter, just curious if that had a material effect or, you know, what you expect to have a material effect in terms of your interest rate, where it's positioning moving forward. Just curious if that had much of an impact.
spk07: No, not really. Brady, the balance sheet remains moderately asset sensitive. We hedge it at the top of the house. So it really isn't going to have a material impact on the interest rate risk position.
spk02: I remind us in terms of loan floors, just curious what we might have to see from a movement from the Fed to penetrate or have a significant impact on loan floors on the portfolio?
spk07: No, again, I don't think so. There are especially not with a movement from the Fed. I don't think you'll see a material impact from floors initially.
spk02: Got it. And then a housekeeping question.
spk07: The business where we have floors that are operative today is in the warehouse business. So it's not going to be that big of a thing.
spk02: Got it. And Leslie, how should we think about the effective tax rate? You said there's some noise this quarter. Just maybe how that pans out into fourth quarter in 2022?
spk07: Yeah, I mean, it'll be down a little bit in the fourth quarter, and the main driver of that is, you know, probably more down around the 24% level, and the main driver of that is just that the Florida tax rate, Florida just enacted a law that reduced the 2021 tax rate to just a little over 3%, and then it goes back to normal in 2022, so I guess we'll take it while we can get it, but... But that's the main part.
spk02: Got to remind me... And what's the normal rate for 2022? Five and a half. Great. Thank you.
spk05: Our next question coming from the line of Jared Shaw with Wells Fargo. Your line is open.
spk00: Hi. Good morning. This is Timor Braziler filling in for Jared. If we could just circle back again on the loan growth, I'm just wondering how much visibility is there to the level of future pay down activity or M&A activity in the space? And then when you combine that with the low utilization rates, I guess, are we close to reaching an inflection point of kind of both of those stabilized? And how meaningful could that inflection point be?
spk14: So I'll answer them separately. When it comes to line utilization, we have almost no visibility. You know, people don't give us a heads up when they are going to call, you know, draw on the line or pay down a line. We often find out the same day or the day before. On M&A activity and payoffs happening for those reasons, we have maybe a month's worth of view. But it's not like we know a quarter out or two quarters out somebody's going to sell their company or a building. We'll only find out when the payoff is maybe three weeks away or four weeks away. Production, we obviously have a much better handle on. We know what the pipeline is. With a fair amount of certainty, we know what we're closing this quarter, and we even know a decent amount for next quarter. There's always fallout that happens, things get delayed and all that stuff, but we have enough practice over the years to know what percent will actually pipeline will close and what will just fizzle away, what will slip. That we feel pretty good about. Payoffs and line utilization is much harder.
spk00: Okay, and maybe asking the payoff question in a different way, is much of that or do you get a sense that any of that is kind of pent-up activity from what didn't happen in 2020, or are we in a new normalized level where, we should just expect there to be more M&A activity moving down kind of a market gap.
spk14: I think cost of capital has come down forever now. That's what is driving it. It's a lot of money people have to borrow at very low rates. So cheap money will fuel M&A.
spk12: I would say in many cases, even our clients that are purchased in M&A transactions, they themselves do not have visibility into it because they were not running a show. Many of these are unsolicited efforts by private equity to get into this space. I mean, normally if somebody is actually going to put the company up for sale and run a process, we tend to know that a little bit more in advance. But many of these are unsolicited moves by private equity to enter into certain industry segments with certain companies, and they kind of come out of the blue.
spk00: Okay, understood. And then just, if I could, just one more follow-up on deposits, some of the mix shift there on the interest-bearing side. The movement out of the savings and money market accounts and the slight uptick in time deposits, Are you trying to capture some duration? Are you getting any customers?
spk07: Those two things are really unrelated. Okay. The take-up and time deposit. It's not like the money shifted from directly the money market bucket to the time deposit bucket. Those two things are actually unrelated. You know, what comes in in time deposits kind of comes in. We're not really making a push in that space. The money market runoff was as Raj and Tom described to you earlier. We're just reducing our our exposure to some of these large accounts that we think may be price sensitive in a rising rate environment. So I don't really think there's a relationship between the two things.
spk00: Understood. Thank you.
spk07: Or not a direct one anyway.
spk14: Yeah, CDs are still priced between 10 and 20 basis points for the most part. Yeah.
spk12: Yeah. In each quarter, obviously, we have run off of what was a CD book that is mature and we have that.
spk07: Yeah. this quarter and it did pick up a little bit this quarter, but I don't think that was anything where we were out campaigning or advertising or anything like that.
spk05: Our next question coming from the line of Christopher Marinette with Jenny Montgomery Scott.
spk15: Hey, thanks. Good morning. I wanted to follow up on technology, Raj, from a broader perspective. I mean, how do you feel your position now for your digital build-out? What is left to do? Do you still think that you have what you need for the next five years for Bank United?
spk14: Yeah. So I've spoken about this at length in a lot of investor meetings. I think you'll never be done. That's sort of the sea change in technology. I grew up in that mentality of do we have enough to get to $50 billion or $70 billion or whatever? Do we have enough technology or do we have to do more spend? I don't think we can think of technology in those terms anymore. I think it is a constant spend because it is evolving faster. And I don't actually think of that as a negative thing. I think technology is what is driving business now. So the more you spend on technology, it's almost like we used to think about producers. You spend on producers to grow a business. You never ever thought twice about spending on producers as a bad thing. I think it's the same with technology. It should enable business. It should enable solving customer pain points. When you go find them and you can solve them, you can create an edge for yourself in the marketplace and you can capture market share. That's really the transformation that we've actually gone through over the last four or five years. So So to your question, over the next five years, we know what we're spending on over the next 12 or 18 months. Those projects are on the fly, but there will be more stuff that will come after that, which we may not have identified today, but there will be budget that will be put in place, and we will find new niches and new customer pain points to solve and develop solutions for them and then go sell them and earn market share. it is a big cultural change inside of banking. And, you know, we are working heavily on commercial payments hub is what we call that. That's our big spend over the next 12 months or so, which, you know, hopefully by this time next year we will be live. But I'm sure there will be something which will go beyond that.
spk15: Great, thanks for that, and I guess from your perspective, your competitive position is still as good as ever, if not better, as a result of what you've invested in.
spk14: Yeah, absolutely. It is, you know, four or five years ago, maybe we were doing a little bit of catch-up, but once we actually went onto the cloud, invested in the platforms that we have, you know, I feel pretty good about where we are today, but I never want to get complacent and say, we're done, now we can actually just chill. and have the IT team take a breather. There will be no breather. There's always stuff that you will be working on. And I'm asking the front end of our company to work closely with the IT people. All we do is sell our balance sheet. If we just buy and sell money, that is such a commoditized business that you are not going to make an outsized return on capital. you really have to start with defining a customer problem and then finding a solution that is unique and proprietary, solving it for that customer, and then going out and finding 10 other customers like that and trying to sell it. That really is the heart of what we're trying to achieve medium-long term. And that's a lot of the success you see in the deposit portfolio and some of the lending business we're doing. Yeah, at the end of the day, of course, we make our money by spread income. We want people to take loans from us and put deposits with us. But they shouldn't do that just because we have the best price. They should do it because we're solving a problem for them. And a large part of the deposit success we've had is actually that, you know, products we invested in about three or four years ago. We don't advertise that too loudly for competitive reasons, as you can, you know, fully appreciate. But that's really what it boils down to. in some ways, that's what fintechs are doing, if you think about it, right? They take a customer problem and they go and solve it. It's a very narrowly defined customer problem, but then they solve it really well, and they earn good economic rents for solving that. And we're trying to do the same thing more in the commercial space.
spk15: Great, Ross. Thank you very much for the background. I appreciate all the information this morning.
spk05: Our next question coming from the line of Samuel Varga with Stevens Inc.
spk10: Good morning. This is Samuel Varga. I'm from Brody Peston.
spk14: Good morning.
spk10: I wanted to go back just for a moment to loan growth and returning to the residential and consumer portfolio where you had a pretty substantial uptick here. And I understand that $50 million of that is kind of explained out of the $750 million. So I wanted to Ask where the additional $700 million of growth came from?
spk07: Just our regular jumbo correspondent portfolio.
spk14: It's hard to have completely smooth growth. I think if you go quarter over quarter, you'll see it up and down a lot. This quarter was high, but I don't think it was that high in the couple of quarters before that.
spk07: But that's really that additional growth. I know you see the title residential and other consumer, but the other consumer portion of that is so insignificant that I keep asking people, can I just take that out of the title, and they keep telling me no because it's in there. It's all residential or almost all residential, and the big chunk of the growth for this quarter was in our jumbo portfolio. Yeah.
spk10: Understood. Thank you. That's very helpful. And then just turning to yields a little bit, could you give some additional color on the kind of the delta between the roll-on and roll-off rates?
spk07: So I don't have the roll-off rates in front of me. The roll-on rates in the residential book are running 245 to 250, and in the commercial book a little below three right now.
spk10: Great. And then on the securities book, what sort of rates are rolling on these days?
spk07: Over for the quarter, it averaged 120.
spk10: Awesome. And then I guess my next question would be if you could just give a sense for the effective duration of that securities book currently. Okay.
spk07: The configuration of it? No, no, the duration. Oh, the duration. It's about 160. It's up to, and it's been consistent for a long time, but about 160. Great.
spk10: Thank you very much. That would be all for me today.
spk14: Okay. Great. Thank you.
spk05: Our next question coming from the line of Stephen, I suppose, with JP Morgan. Your line is open.
spk08: Hey, can you guys hear me?
spk07: There you are. Good morning.
spk08: There we go. Good morning. Raj, I wanted to ask this question. So other banks are seeing elevated payoffs too, but they're also seeing stronger commitment growth. It looks like your commitments were up by less than 2% in the quarter, and even what you went through with the Delta variant, you know, the impact basically less than in quite a bit of Florida. I would have thought those commitments would have picked up. Do you have any color there?
spk07: Which commitments specifically?
spk08: Commercial. Commercial commitments.
spk07: I don't think we've actually disclosed that number.
spk08: It's in the deck, Leslie.
spk07: That doesn't include the pipeline, though, Stephen. That's the commitments on the existing book that you're seeing in there.
spk08: Right, but as other banks are calling that out, they're seeing 5%-ish growth quarter over quarter. I think you guys are 1.5%. Just given Florida's fairly open economy, what are you hearing from your customers? Are they not as optimistic? on the prospects for their growth. It's just surprising that you're not seeing stronger commitment growth here.
spk12: Yeah, I wouldn't necessarily say they're not as optimistic as what they see, you know, for the future in terms of the business. Some of that, you know, it's hard to answer that in a real granular way without sort of having deep insight into what everybody else's book looks like. Some of it can be mix of business, you know,
spk14: Actually, a lot of it is a mix of business. We're not in some of the, you know, for example, the capital call line business, which we were discussing actually just before this call. We're not a big player in that business. That has seen a significant amount of growth. You know, all the private equity discussion that we've had on this call, how active private equity has gone. We think about, you know, what businesses would actually benefit from private equity growing so much. It would be a capital call line business, which we're not in in any meaningful way. So I think it's a mix of business. Our lines tend to be formula-based lines against inventory and receivables. Well, inventories are struggling for all the reasons we read about every day in the paper. And shelves are not stocked. And if shelves aren't going to get stocked and receivables aren't going to grow, we are going to lag with that. So I think it has probably got to do with the kind of line business we do versus some of our competitors might be.
spk12: Okay. Yeah, I would probably also add, Stephen, that, you know, as we think about the sales team that we have and what we're asking them to do, the deposit growth, the TM growth, and other things are a very center part of what we're asking people to spend a great deal of time on. You know, loan growth obviously is a piece of that, but when we look at... when we look at the attractiveness overall of a potential client, it isn't just a commitment size number that's attractive to us. It's kind of a full banking relationship kind of number. And so, you know, we're not as solely focused on commitment as being the predominant driver of where we put our sales effort as much as we are. That's an important component, but as much as we are, you know, will this drive NIDDA growth? Will we get operating a TM business out of it? And is this a long-term client for the organization that we find attractive?
spk08: Okay. That's good color. I wanted to ask, so residential was strong this quarter, right? on the long growth side. Were you guys just more opportunistic, given C&I coming in a bit light, or should we expect strong growth in resi to continue?
spk14: Actually, looking at the pipeline for resi right now, I don't think it will be a repeat of this quarter. I think a few things fell into place. Some of it was actually just things that rolled off from the previous quarter into this quarter. So I think this was an outsized quarter for resi. I don't expect it to be that strong next quarter.
spk08: Thanks. And then finally, if I could squeeze one more in. Leslie, on the other fee income line, what's putting so much downward pressure on that? I think it's down just under 30% now year over year.
spk07: Yeah. So, Steve, that's a kitchen sink line, I guess, is my best way to describe it. There's just a lot of things in there that could be up or down in any given quarter. I don't think there's anything going on in there that I would call a trend. A couple of the things that happened this quarter, we actually had a negative mark on our commercial servicing rights, which in the overall scheme of things are very immaterial and come out of the SBA portfolio. There was a negative mark on some of our BOLI this quarter. It's just kind of miscellaneous, episodic things, none of which I think are indicative of any kind of trend.
spk08: Okay. But is this level a decent run rate, we should assume?
spk07: Actually, no, probably a little higher, actually, is a better run, right? I think we had a couple negative things that went through there this quarter that I think were kind of not normal.
spk08: Okay. Okay, great. Thanks for taking my questions.
spk07: Thank you.
spk05: I'm showing off the questions at this time. I would now like to turn the call back over to Mr. Rochester for any closing remarks.
spk14: Thank you very much for joining us, and we'll talk to you soon. Thank you. Stay safe, everyone.
spk06: Bye, everyone.
spk05: Ladies and gentlemen, that's the conference for today. Thank you for your conference for today. Thank you for your participation. You may now disconnect.
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