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spk06: Good day, and thank you for standing by. Welcome to the Bank United fourth quarter and fiscal year 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone, and you will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Greenfield, Corporate Secretary. Please go ahead.
spk11: Thank you, Michelle. Good morning, and thank you for joining us today on our fourth quarter fiscal year 2022 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 limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31st, 2021, 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.
spk05: Thank you, Susan. Welcome, everyone. Thank you for joining us. So we announced earnings this morning. EPS for the quarter came in at $0.82. For the fiscal year, $3.54. Let me get quickly into the components, the key components that you will find in the release. Loans. Loan quote came in at $619 million. If you look at our meat and potato businesses, commercial NCRE, it actually grew $722 million. So we're very happy about what the lending teams were able to get done this quarter. Deposits, which are under a lot of pressure across the system, we actually grew deposits a little bit, $160 million, though NIDDA did decline given the rate environment and how Fed Funds is. So NIDDA declined. was $756 million. DDA now stands at about 29% of our total deposits. When we started this DDA growth journey five, six years ago, I think we were at 14%. Just before the pandemic, we were at about 18% DDA. Today, we're at 29%, so I feel pretty good about it. Despite the reduction in DDA that we saw this year, we're still in a pretty decent place. Margin expanded again, though a little less than in previous quarters, as we had highlighted to you. Margin came in at 281. It was up from 276 in the prior quarter. So for the year, I think margin grew by 30 basis points, which is right in line with what we had guided to you at this call last year. Before I talk about provision, let me talk a little bit about credit quality. Criticized classified assets continue to come down as they have over the last many, many quarters. Our NPLs are actually now at 42 basis points. They were 64 last quarter, and this includes a guaranteed portion of SBA loans. If you back that out, NPLs are now down to 26 basis points. Just before this call, I asked Leslie to check for me what the NPLs were before the pandemic hit. And, you know, NPL today in dollars are at $105 million. And before the pandemic hit, we were at $205 million. So NPL today are half of what they were. And so from a credit quality perspective, from the portfolio, you know, the last two years, we've been sort of, you know, consciously and subconsciously been getting ready for whatever slowdown is coming. And we feel pretty good about where we are. whatever comes our way. Having said that, we are more pessimistic about or more cautious about the environment than we were three months ago. So we did tweak our assumptions and increased our reserve. We took our reserve up from 54 basis points to 59 basis points. We, of course, had growth in the portfolio. All of that added up to a provision of just under $40 million. Also, the buyback continued as we had promised last time. We had bought back, I think in fourth quarter, $65 million. We had already bought 10 from this authorization in the previous quarter. That leaves us $75 million in this authorization, which we'll continue to execute as we see fit. Quickly, let me talk about the environment, and then we'll talk about guidance for next year. The environment, 2023, this is the year of the slowdown and possibly even a mild recession. That seems to be the consensus out there. The curve is inverted, as everyone can see. The Fed wants to take short-term rates up closer to 5%, and the 10-year stubbornly wants to go closer to 3%. So it's an inverted yield curve, and it's expected to stay inverted all through this year, probably into next year as well. Last year, the Fed... slammed on the brakes. This year, they're not slamming on the brakes. It looks like they still have some pressure on the brakes. And they'll probably take the foot off the pedals sometime this year. But it's unlikely, at least based on what the Fed is saying, that they will step on the gas pedals. The market disagrees, and only time will tell eventually how things play out. We build all of our internal models and projections and everything based on whatever the future curve is telling us. Labor costs, while they were very high last year, I would say they're still higher than usual, but they are moderating somewhat based on some weakness that we're seeing in certain sectors. So that is good news that labor costs seems to be getting back to normal, but it's not back to normal yet. On the other side, there is good news. Margins are better than we've seen. Lending margins, loan pricing is very rational. We're getting paid for taking credit risk pretty much across the board from the safest to across the spectrum. Any kind of asset you want to participate in, margins are 50, 70, 80, 90 basis points better than they were just nine months ago. And most importantly, Fed is succeeding in its mission of controlling inflation. That was very important. Three or six months ago, this looked like a pretty crazy place that the economy was in. But the Fed is finally having success. And eventually, that will also have an impact on this inverted vehicle. Inverted vehicles are not good for bank margins. So as the Fed finishes this tightening process, and gets to the other side, it will be a better rate environment for banks. But right now, it's in the vertical curve, which is tough. Last year, we gave you guidance around loans, deposits, margins, and so on. We said loans would grow mid to high single digits. They grew 6% in total, 13% for CNI and CRE, our main, like I said, bread and butter categories. Deposits, we said mid-single digits, but starting in January of last year, nobody foresaw what the Fed was about to do. I don't think even the Fed foresaw what they eventually did. So we missed on that. Margin, we said, would expand a bit by 30 basis points, came in exactly as we expected. Expenses, we said, would grow mid to high single digits and did, 7.5% growth in expenses. And, you know, the end result was, oh, we also said we would buy back stock, and we did, a little over $400 million worth of stock. And I grew 15% based on, you know, I actually, one of the metrics I asked this morning, you know, I often look at 2019 as sort of a year to compare things to because 20 and 21 were pretty messy. with large provisions and reversing provision and so on. And the really clean year is 2019. And I often ask about, just like I said about NPLs, what were NPLs at the end of 19 versus today where they are? I ask about margin also. And our margin has, despite the difficult rate environment, our margin is significantly better than it was in 2019. which is sort of an end result of all the hard work that has gone into improving the franchise. You know, cost of funds, while it is elevated at 142 base, cost of deposits 142 basis points, it is 142 basis points in an environment of, you know, north of 4% Fed funds rates soon to get to 5%. So it is, you know, a lot of progress has been made on the balance sheet, whether you look at credit metrics or profitability metrics, Yes, there is a lazy part of the balance sheet still sitting there, very large securities portfolio, large resi portfolio, which will sort of wind its way down over time. But overall, I think the balance sheet is in a much better place than it was before the pandemic. This year, given everything I've said about the environment, I think we're looking at loans going at mid-single digits, deposits doing the same, margins still expanding, though not as much as it did last year. And expenses, again, very similar to last year, expense growth. Buyback will continue. We will get this $75 million done over the course of the next few weeks. And on all likeliness, the board will authorize another $150 after that. A quick reminder, you know, it's been now nine months since we launched our Atlanta presence. I am extremely happy with how that has panned out. We did open a branch in Dallas, but we did not truly acquire a team on the commercial banking side. We are in the market for that now. So Dallas will be the project for this year in terms of having full capability in Dallas, not just a branch. Atlanta is off to the races. I'm very happy with that. And I think going forward, we will look... to opportunities like Dallas, like Atlanta, and continue to grow this, and this will become part of our ongoing strategy. So with that, I don't want to take away all the talking points here. I'll leave some for Tom. Tom, I'll pass it over to you, and then you can pass it to Leslie.
spk01: Great. Thanks, Raj. So as Raj mentioned, total loans grew by $619 million for the quarter. CNI grew by $599 million. and Cree grew by $123 million for the quarter. And overall, to continue the meat and potatoes analogy, the $722 million growth in those two lines of business was extremely encouraging for us. We felt great about it, and I think if we break it down a little bit and look at industry components and asset classes, it was really broad. You can see in the supplemental data that we generally provide in the CNI side. We grew 11 different segments during the quarter. That really led to $600 million, essentially, of loan growth in the quarter. It continues on a strong CNI growth number for the entire year. Just separately, kind of our middle market in corporate banking business, it grew by 25% for the year. So it was just an out outstanding year, I think that's reflective of both our own efforts, and it's also reflective of the fact that we're in great markets. Florida has performed extremely well. All of the major cities in Florida have done very well. We're blessed to be in great markets. As Raj said, we really couldn't be more delighted than we are with what we've been able to accomplish in Atlanta in a very short period of time. hundreds of millions of dollars of commitments in that market, excellent relationships. And we are very enthusiastic about expanding into Dallas. We see Dallas is a very parallel market to Atlanta in terms of size of the MSA, in terms of depth of the economy and breadth across the number of industry segments that fit the kind of risk profile that we're looking for in terms of diversification. So we're excited about that. The rest of Florida continues to do well. We saw good growth in the commercial segments in the New York market in the quarter and throughout the year. So I think both the combination of our efforts, the segments that we're in, and the overall health of the markets that we're in were very important parts of the growth story in the quarter and throughout the year. Last quarter, we had a bit of a growth in Cree. We told you we'd have more, and we did. You know, that's also, I think, a good, solid commitment to, you know, the fundamental parts of the business we want to grow. We had solid growth in the industrial and warehouse segment, again, which is really strong, particularly in the southeast. We have committed a bit more resources to our construction lending efforts and saw the construction loan portfolio grow you know, pick up the bed and we're particularly active in the multifamily construction area, which is a strong growth area in virtually every market that we're in. Multifamily units continue to trail the need for multifamily housing in most of the areas that we're in. So those things really led to what we feel really good about in terms of a growth story for the quarter and for the year. There's some other areas, mortgage warehouse, that environment remains pretty challenged right now. We're committed to that business. We think we'll see some growth in it, but right now the overall housing market, as you know, is not robust, so we're seeing utilization rates fairly low in that business right now. Pinnacle and Bridge continue to decline during the year. I think if the tax rates improve and pricing improves in Pinnacle, that may be an area for growth. We continue to de-emphasize the franchise lending and the equipment finance area, both from an overall quality and just return on asset perspective is not very attractive to us right now. Resi grew modestly in Q4. So looking forward into this year, we continue to see growth in the core C&I and CRE books. We see it across all of our geographies. As I said, we're committed to mortgage warehouse for the long term. and expect to see some growth in that portfolio. Also, if the environment for Jenny May and EBO business improves, there could be some growth opportunities there as well. We also continue to build sales teams and bring on new producers in the market, and we're looking at some key hires even in this quarter as we start off the year, even beyond the Dallas expansion that we've talked about. On the deposit side, total deposits grew by $160 million for the quarter. That growth was in interest-bearing deposits. As Raj said, NIDDA declined for the quarter, which was not unexpected in the environment given the rising rates and tightening liquidity. We did finish the loan-to-deposit ratio at 90%, which essentially was flat from the previous quarter. So with that, Leslie, we'll get into more details on the quarter.
spk02: Thanks, Tom. As we guided last quarter, and as Raj said, we saw the NIM increase this quarter to 281 for 276. The yield on investment securities increased to 433 from 312. The duration of this portfolio stands at 194 at December 31st. The yield on loans grew to 472 from 411 this quarter. That's all mainly attributable to the resetting of coupon rates on variable rate instruments and new production and securities purchases at higher rates. Total cost of deposits was 142 basis points for the quarter, up from 78 basis points last quarter. I'd refer you to slide six of the deck. While this is a story that is obviously still playing out, you can see on that slide the illustration that the spread between the Fed funds target and the cost of deposits has grown quite a bit. compared to back in 2019, which is a testament in my mind to the improvement that we've made in the quality of the deposit base. Total deposit data to date this cycle is about 43%. At the peak of the last cycle, our total deposit data was about 61%. We think it's going to go up from 43%, but we still don't think it's going to get to that 61%. With respect to the reserve and the provision, slides 9 and 10 give some details about the reserve. The provision this quarter was $39.6 million. The ACL increased to 59 basis points from 54 basis points, as Raj mentioned. In spite of the decline in our NPLs and favorable credit quality signs, we built reserves primarily due to an increasing level of uncertainty about the economy. And qualitatively, we weighted a downside scenario more heavily in establishing our reserve this quarter. Majority increase in specific reserves that you saw this quarter, which was another contributor to the reserve bill related to one single loan that was charged off before the end of the quarter, and substantially all the charge-offs taken this quarter were related to that particular loan. There's not really much to comment on with respect to non-interest income and expense. I'll just reiterate that for the year non-interest expense, if you factor out the hedge loss that we took in the fourth quarter of 2021. It was up 7.5%, which is really exactly what we've been guiding you to since the first of the year. So we came in right where we've been telling you we would with respect to that. I don't think there's anything there particularly to comment on for this quarter. So with that, I'll turn it over to Raj for closing comments, and then we'll take your questions.
spk05: I will open it up for questions. I know there are 19 of the banks that have released, so we will... Let's take questions. Operator, you can open up the lines.
spk06: As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Ben Gerlinger with Hope Group. Your line is now open.
spk04: Good morning, everyone. Appreciate you taking the time. I was curious. I just want to follow up on the guidance I was given. You said kind of a mid-single-digit loan growth and deposit growth. Was that correct? Yes. And then kind of thinking just the deposit perspective with quantitative tightening and kind of fighting against the treasury curve, really, in terms of what else is available to depositors. I mean, when you look year over year, your deposits are down. I was curious, is there any new action? Are you willing to go to price the market in order to garner some overall growth relative to peers? I mean, you guys aren't the only ones. I don't mean to pick on you, but deposits are down. I was just curious on what actions or strategy you might be taking to get them up. Yeah.
spk05: Yeah, I think the big difference, and we could be wrong on this, but the big difference from last year to this year is that we're not expecting that slamming of the brakes that we saw with the Fed, but a more gentle sort of slowdown, tightening of monetary policy and eventually ending that tightening. If the Fed continues to surprise us with very aggressive action, then achieving McTinkle business will be hard. Of all the guidance I've given you, whether it's loans, margin, or deposits, or what have you, the deposit guidance is the hardest one to really get. And some of this is also our desire not to let our loan to deposit ratio get too out of whack and get past 100 or 105. So you can't gather deposits. It comes down to price. So, you know, we're not, you know, loans, you can look at the pipeline and kind of guess, okay, here's where the loan demand is and this is what I know typically we're able to close up the pipeline and so on. With deposits, it's much harder. But based on, you know, another 325 basis point increase and eventually slowing on grade hikes, I think if that's what happens, there is a good chance that we will end up at mid-single digits. If it's worse, if the tightening is harder and stronger and longer, then it will be tough to get to mid-single digits.
spk01: Ben, I would also add that one of the things that we look at is when you look at the creation of new relationships across the franchise and you look at virtually all of the business segments that we're in, The overlying economic activity obviously impacts the balances that might be in any individual account, but we have very, very good trendline information in performance history this year as it relates to the number of new relationships being created by all of the sales teams, and that gives us some confidence that that will continue as we look into the year. Gotcha.
spk04: Yeah, no, I have no problem in thinking that you guys can get the deposits just really at what cost. And then kind of conversely to that, you guys are expecting some margin expansion from here. So that's where I'm just kind of squaring a circle to some degree. But the latter question I had is more kind of the nuance of probably for Leslie. But when you think about the expenses, BKUs historically had some pretty clear seasonality, I guess you could say, from quarter to quarter, but that kind of has fallen off as of late. I was just kind of curious, do we still expect one Q to be a little bit higher relative to two, three, and then fourth quarter is the highest on the year, or has that kind of gone to the wayside? I'm just trying to look for some overall quarter over quarter expectations. I get the whole year is around seven ballparks, but just quarter to quarter.
spk02: We don't spend a lot of time obviously focusing on any one particular quarter, but typically compensation expense is higher in the first quarter just due to the impact of certain payroll taxes and benefits and whatnot. But as we've been investing in people and bringing new sales teams and support people on to support growth as a business, you may have seen that trend smooth out a little more because those people tend to come on over the course of the year and headcount may not be held constant. So I, again, don't spend a lot of time and energy trying to figure out what the quarter-to-quarter forecast is. I'm more concerned with the year as a whole. But you will see that spike in benefits, but the trend may be smoothed out a little bit by new FTEs coming on more evenly over the course of the year.
spk04: Got it. OK, that's helpful. I appreciate the time, everyone. You guys have done a great job. kind of remixing the deposit side of the balance sheet. So it's clearly set you guys up in a much better position than we were a few years ago. Thank you.
spk06: Please stand by for our next question. Our next question comes from Will Jones with KBW. Your line is now open.
spk09: Great, thanks. Good morning, guys.
spk06: Good morning. Good morning.
spk09: So I wanted to stick on the expenses for a sec. Roz, just to clarify, you said expense guidance is the same as last year, which would be mid to high single digits, correct? Yes. Okay. And just as we think about, you know, the base, which with, you know, that mid to high single digits grows off of, is the right way to think about it to, you know, annualize the fourth quarter and grow from there, or is it really just cumulatively?
spk02: Take the full year. Take the full year and apply that to the full year.
spk09: Okay, helpful. Thank you. And then, you know, Roger, I know you called out maybe, you know, one or two, you know, maybe non-recurring or one-timer charges that happened in the third quarter. Was there anything similar that happened in the fourth quarter? You know, I know there's still a fairly big pickup in expenses. Not really.
spk02: I don't think there's anything particularly unique in the fourth quarter.
spk09: Gotcha. Okay, great. Thank you. And then, Just moving to, you know, I appreciate all the great commentary over the allowance and, you know, the bump-up link quarter there. Just as it relates to the one charge-off you guys took, I was hoping to get a little more color around that. You know, I appreciate that there were some specific reserves, you know, tied to that charge-off. It looks like maybe based on the way your NPAs moved, there was a CRA loan.
spk05: But I was just hoping to get, you know, a little more color. So that loan isn't working out. So I have to be careful what I say. What I will tell you is in a situation where we lose faith in the financials of the company, the certified financials of the company, we tend to charge off the loan. We basically write off the entire thing. This is a developing situation. it's only three months in in terms of you know when we really found this out would be a little more than three months into this and we just took the most conservative stand which is we can't we don't really know there's some it looks like there is some irregularities in financials of the borrower and we're just not charged off the loan which is what we did now there are recoveries that come back I'm hoping there'll be some recoveries, but not knowing that with any confidence, we just write off the entire amount.
spk03: Great.
spk09: So, you know, digging deeper, is there any specific industry or, you know, any kind of specific situation?
spk05: You know, when you audit your financials come into question, it's not about the industry. It's about just that one situation.
spk09: Got it. Understood. Thanks. And then, you know, just thinking holistically, you know, you have mid to high single-digit expense growth year-over-year. You know, I appreciate the guidance that you think, you know, that the margins still could see a little expansion from here. I mean, you know, just putting the two together, Raj, do you feel like you could still grow revenues over, you know, the mid to high single-digit expense guidance, you know, and still maintain some of your positive operating leverage as we move to 2023?
spk05: Yeah. Yes, over time, I absolutely agree that, you know, that's what we're shooting for and that's what we will get to. It may not be that literally every quarter, and it is a tough environment to try and achieve that in. But remember, we're making investments not for the next six months or for the next even 12 months, Some of these investments we're making are multi-year investments with multi-year payoffs. We had a lot of discussion this time around during the budgeting season as to this is a year of slowdown, possibly even a recession. The curve is inverted, should we pull back on investments? And you really cannot take a very short-term view of investing. You have to take a longer-term view. so the things that we put into motion we're not going to pull back because you know the next couple of quarters might be a difficult banking environment there may be a recession in the second half of the year you you know you're you're hearing me talk about we launched atlanta last year we're launching uh something in dallas this year possibly new markets next year these are all long-term investments uh so are some of the technology investments so You know, you can't yo-yo your investing sentiment, you know, quarter by quarter or even year by year. You really have to stay the course. We have, you know, from an expense to assets ratio, we're one of the, you know, not just better, one of the best banks in the country. I sometimes argue that we're not investing enough, which is why our ratios are as low as they are. So investing, you know, on a steady pace is important. Revenue, unfortunately, does get a little bit, you know, it's more tied to the environment that we're in, and this is a tough year, but next year will probably not be. So, you know, but over a period of time, what you just said, you know, is our expectation revenue will grow more than expected? Absolutely. Otherwise, why do it?
spk02: And I will say currently our forecast is for a modest amount, not a lot, but a modest amount of margin expansion next year. Obviously, as Raj alluded to earlier, the hardest part about that to predict is the deposit environment. Yes.
spk09: Right. Totally understood. Great call, Raj. Really appreciate that. And that's all the questions I had. So, thank you.
spk06: Please stand by for our next question. Our next question comes from Timor-Brazil with Wells Fargo. Your line is now open.
spk08: Hi, good morning.
spk02: Good morning.
spk08: Maybe circling back to that last comment from you, Leslie, on margin expansion next year, I guess what's the rate environment or rate outlook that you're using for that guidance? And then just looking at the deposit spot rates ending the year versus the average, it seems like that's going to be a headwind. in the first quarter. Is that kind of back-end loaded, that comment, or do you think there's enough happening on the asset side to offset the low funding pressure?
spk02: I'm not that focused on what happens quarter by quarter because that's extremely hard to predict. But we're using the forward curve. So this has Fed funds peaking at 5% in the second quarter and dropping to 4.5% to 4.75% by the end of the year with an inverted treasury curve throughout the year. So that's the forward curve that underlies those estimates. But as I said before, the wild card is the deposit environment. As Raj expressed, we're very confident that we can grow core deposits this year based on our geographic expansion, the growth of the Florida economy, the producers that we're adding. our business people are very confident that we can record deposits given the environment that we believe is going to play out. Should the Fed stand on the brakes harder, the environment be more challenging than we think, that margin prediction could come under pressure.
spk08: Okay. And maybe just asking you to look at the deposit crystal ball one more time, but on the way down or once the Fed stops at least hiking, What's the expectation for the deposit environment in your geography? I mean, I'm assuming it's going to remain competitive, but can you actually see deposit pricing continue to increase if the loan demand is still there? Or do you expect it to kind of tail off at a similar pace to what it did on the way up?
spk05: You're asking about not just the next six or 12 months, but beyond that. And it's very hard for me to say what the deposit environment will be like. There is a lag on the way up. There is some lag on the way down as well. And, you know, but it's really hard for me to predict what will happen when the Fed starts to pull back. You know, I don't know what long demand will be like. I don't know what the economy will be like. Will we be in a recession or not? It is, you know, I would say the best It'll be hard actually for you to even go back to that last cycle and try and look at that. The last cycle was really weird because we're not going to have a Fed going to zero overnight kind of a situation. It's going to be a slow drop. A very gentle decline is what I think will happen with the Fed. But it is very hard for me to say what will happen a year out.
spk02: I do think the more rate-sensitive parts of the deposit portfolio will respond very quickly, either way, on the way up or the way down. But with the more core portions of the deposit portfolio, I think you see a lag on the way up, but you also see a lag on the way down. It's very difficult to predict. I wish I had that crystal ball you referred to.
spk05: Remember, it's even more complex for us because a lot of our deposit business is in one way, shape, or another, tied to the real estate business, right? The refi business, which is dead right now, or even the purchase business, which is not doing that well. So, you know, we could, you know, have a mini refi boom before you know it. I mean, if the tenure is flirting with 335, that could happen, and that could actually help. That will help the warehouse business, but that will help the deposit business as well. You know, it's a lot of pain that we felt this year was from the title insurance space. And that industry is in a deep recession, so to say, if you talk to anyone in that industry. But that could come back. That's very rate sensitive. And Fed doesn't have to move too much. It's just the long-term rates keep doing what they're doing. You could have, you know, significant pickup in activity. We're not counting on that, but we're very cognizant of that sort of coil spring, if you were to say.
spk08: Great. Okay. Thank you for the call. I appreciate that. And then just lastly for me, the CNI growth all year and in the fourth quarter was quite impressive. I'm just wondering, you know, how much of that is increased utilization, if any? How much of that is new client growth? And then, you know, are you able to get the positive relationships with those new CNI
spk01: clients that you're bringing on board how much of that production is actually being self-funded yeah i would say that we saw very little lift from utilization throughout the year when we look at production in the cni teams throughout the entire year it was it was a very strong new client production new relationship production um we are able to you know get significant deposits you know, out of these, most are general focuses on relationship banking opportunities. And these tend to come with, you know, strong depository and treasury management type relationships. But, you know, we didn't see much lift, you know, at all in utilization rates, you know, throughout the year. So, you know, we'll see how that plays out in the 2023. You know, originally when we started the year, we thought we would see more lift. We thought we'd see, you know, maybe 500, basis points of lift. We didn't see that. It stayed pretty flat throughout the year. And if that were to pick up, that would help us as well. But what we did this year was really a lot of new relationship production this year across all of the CNI segments. Got it.
spk08: Thank you for the call. Appreciate it.
spk06: Please stand by for our next question. Our next question comes from Steven Alexopoulos with JP Morgan. Your line is now open.
spk10: Hi, good morning. This is Alex Lallon for Steve.
spk11: Morning, Alex.
spk10: Good morning. My first question is on deposits. Can you talk about the decrease in noninterest-bearing deposits? What are your clients moving those balances to? Any color on whether it's moving internal or competition from... fee bills or other regional things.
spk02: We're not talking this quarter because we didn't experience that this quarter in non-interest-bearing deposits. No, we did. Sorry, misunderstood your question.
spk05: Yeah, so it's a laundry list of things. So there's still slowdown in the real estate industry. We're seeing a title business average balances in those accounts from the smallest to the largest, everything declined. So it's an industry-wide trend. That was one. We saw people, our clients, use money for buybacks, for dividends, for just distributions. That was a fairly large category. Also, I'd say as ECRs have moved up, the need to keep balances to avoid fees from the bank, you know, that needed balance have gone down. So when that happens, capital frees up and it moves into money market or leaves the bank and goes, you know, go out and buy treasuries. We don't have a wealth management business, so we're not seeing that. You know, corporate customers don't typically, you know, take money out of the bank and buy treasuries. Some of that might be happening with whatever small retail business that we do have. So it's a mix of those things. But I'd say that the real estate industry suffering is still probably our largest driver, followed shortly with just people taking distributions and using money for either investments or buying properties or what have you. So there is a money is not being, you know, left idle and people are much more, you know, corporate customers, commercial customers are much more aware, you know, of the cost of idle money. Thanks, Rodney.
spk01: In 2021, there was a pretty substantial buildup in corporate deposit balances, you know, across really all industry segments coming out of the pandemic that It's just been utilized.
spk10: Thanks. And as a follow-up to that build-up, any sense of how much DBA is considered excess deposits for your customers before they get to, like, a core operating DBA level?
spk05: No, that's very hard for us to, you know.
spk02: We spend a lot of time trying to analyze that, but I still don't think we know the answer to the question.
spk10: Fair enough. And on the net interest margin guidance for expansion in 23, any color in terms of the trajectory? Do you expect expansion every quarter? Or at some point, do you expect a reversal of that but still end the year higher?
spk02: I think that's very difficult to predict. There's just too many external factors, particularly with respect to funding, that are going to impact what happens quarter by quarter. I think looking at the year as a whole, get a little bit better idea, but I'm reluctant to try to pinpoint what the NIM is going to be quarter by quarter.
spk10: Got it. And just one last question on the other fee income line of $7 million. It was a little bit elevated this quarter compared to the rest of the year. Can you touch on what drove this and if there's anything one time in nature there? Thanks.
spk02: It's just really cats and dogs, Alex. There's no one thing. There's a lot of puts and takes in there. One of the things that's been kind of volatile over the last year or so has been BOLI revenue. I don't really know how to predict that, but it's no one thing. There's just a lot of puts and takes in that line item. I don't think there's anything that I would necessarily regard as either something to call out specifically. I do think in terms of the core items that are in non-interest income, we'll see a steady increase. that all the little puts and takes can be episodic and volatile. I don't think there's anything material enough to call out in there.
spk10: Okay. Thanks for taking my question.
spk06: Please stand by for our next question. Our next question comes from Steven Scouten with Piper Sandler. Your line is now open.
spk07: Thank you. Good morning, everyone. Appreciate the time. The NIM guidance for next year is pretty encouraging relative to what we're seeing for most of the industry for the central pace of expansion. Can you tell me, I guess, one, is that from the 281 fourth quarter level or is that more from the 268 full year level?
spk02: I mean, I was really, when I gave you the guidance, was referring to the full year level. I'm taking a look right now if I can find it just to see. I would expect it to expand from the 268 full year. I would also expect it to expand from the 281. Having said, though, with the caveat again, it's going to be a very challenging deposit environment, and if that doesn't play out the way we're forecasting, that could put some pressure on that.
spk05: And we're not expecting as much of an expansion as we did this year. It'll be very modest.
spk07: Understood. I'd still say that's encouraging, and it probably plays to an earlier point, maybe that, Raj, you said you feel like you're getting paid for your growth, getting paid for the risk you're taking. So can you talk to maybe what you're seeing on new loan yields? Because I'm presuming you're seeing some good expansion there, even in light of the funding pressures.
spk02: I think, you know, new commercial loans for the quarter, so higher at the end than at the beginning, but for the quarter, new commercial loans came on in the mid-sixes on average. And that's CNI and Cree and everything within the commercial space averaged together for the quarter.
spk07: Great. Okay. And then maybe digging back into expenses really quickly, I just want to make sure, like if I look at expenses, it looks like they're up 12% year over year, 7.6% quarter over quarter.
spk02: So I just want to make sure if we're... Yeah, when I take total expenses for this year and total expenses for last year and I back out, once my math is wrong, which is possible, and I back out that hedge termination loss we had last year, I get an increase of right about 7.5% year over year.
spk07: Yeah, I'm doing the same thing and getting like 12. But I guess either way, the expenses have gone up about $10 million a quarter. Each of the last two quarters kind of in line with revenue growth. So do you think in 23 that that revenue growth can kind of outpace the size of expense growth?
spk05: My comment, you know, a couple of questions ago, long term, that's what we're shooting for. It doesn't always happen every quarter. And 23 is a tough year to actually achieve that in. But that is certainly, you know, what we're here to achieve long term.
spk02: I mean, our forecast would show that revenue growth will exceed expense growth next year, but it's a very challenging revenue environment, and there's a lot of things happening in the environment that we have no control over.
spk07: Definitely. Okay. And then last thing for me is, you know, the big question I get from investors a lot is, you know, Where's the margin for error at Bank United? You know, if we've got, you know, what was ROA this year, 80 basis points, 67 basis points this quarter, and then one of the lower loan loss reserves still at 59 basis points. So I guess how would you speak to that and kind of assuage folks that might have concerns that if we do enter, you know, a worsening environment that there's just less margin for error given the lower profitability and lower reserves?
spk05: I think our margin, as well as our reserve levels, are a function of the portfolio that we have. We have, compared to a typical bank, we do have a much higher level of resi, long-time resi being government guaranteed. We have investment-grade municipal portfolios. We have a lot of these low portfolios that have lower margin and lower losses and lower reserve. I think that the point I made early on that if you look at where our NPLs are at the absolute level at 26 basis points excluding sort of guaranteed SBA loans, that is also related to the kind of portfolio we have. If you look at on a relative basis where our NPLs were December 19 to where we are today, Our NPLs are half. So, you know, the portfolio over the course of the pandemic has really become even safer. But we've been able to grow margin, not because we're taking more risk, but because, you know, we improve our deposit base. So margin has improved significantly from 19. NPLs have come down significantly from 19. Deposits have improved significantly from 19. So You know, sometimes just looking at a number at the top of the house without color behind why that number is what it is is often, you know, where people get tripped up. Every bank is a little bit different. And, you know, and over time, you know, you really have to look at the composition of the balance sheet to really, you know, get good answers on why the numbers make sense or don't make sense.
spk07: Okay, great. That's very helpful, Raj. I appreciate the time, everyone.
spk06: Please stand by for our next question. Our next question comes from John Arstrom with RBC Capital. Your line is now open.
spk00: Thanks. Good morning, everyone.
spk06: Good morning, John.
spk00: Stephen kind of took my question, but I'll ask it a different way, Raj. Are you more pessimistic or is this step up in provision just out of caution, your cautious nature? What's the provision message going forward, I guess, because obviously the lower ROA was driven by that.
spk02: The provision this quarter was pretty heavily influenced by the Moody's S2 downside scenario. So I think we're well positioned from a reserve perspective in the event of a mild recession. Obviously, if the economy totally goes off the rails and we have a severe recession, well, all bets are off for the whole industry. But I'm not expecting that to happen. So I think we're very well positioned. And I expect provisioning, sitting here today, I expect provisioning for 2023 to really be mostly a function of production.
spk00: Yeah, growth plus charges is what I'm thinking. Okay. Have you guys seen any changes in the quality of your pipelines at all?
spk05: Not in the quality, but in the quantity, we have seen a little less robustness in the pipeline. And some of it is probably because we had a pretty big quarter and we closed a lot of stuff. Nothing really spilled over into January. But some of it, I suspect, is also customers basically looking at, you know, the environment and saying, you know, maybe I want to wait a little bit to make the next investment, build the next factory or the next warehouse. Some of that, you know, when we talk to clients, I can see, you know, the intended effect that the Fed wanted to have. It's actually happening in the real economy. People are more cautious. People are thinking hard about their expansion plans and and being on the margin a little more cautious. So that is also influencing our guidance we're giving you about loan growth, that in this year in which everyone's expecting a mild recession, you're not gonna see some outsized level of growth. Everyone would be responsible. Yeah, okay.
spk01: Yeah, I would add that you particularly see that in the real estate business where pipelines and investment is driven by there's a substantial amount of capital on the sidelines today in the real estate markets. But if people kind of read into what they think the curve is going to look like, or at least what the curve looks like today, towards the latter part of the year, people are thinking the cost of fixed rate debt will be less than it is today. So investment strategies are being paused a bit, particularly in the Korean markets.
spk00: Yeah, okay. And do you guys think a pause probably changes that outlook a bit?
spk02: No, I think that is encompassed in the outlook that we gave you.
spk00: Okay. Okay. And then just one more on commercial real estate. It's a $30 million number last quarter, so maybe that's the number we're looking at. But you guys don't have a single non-performer the way you categorize commercial real estate. Correct. Talk a little bit about what you're seeing in the quality of the portfolio. It's obviously on every investor's mind, but it looks like your portfolio is very, very clean. Are you seeing it eroding? Are you being more cautious? Or do you feel like this is more symbolic of your portfolio and maybe the industry is going to get a little bit worse? That's all I had. Thanks.
spk05: Yeah, I think it's a very detailed answer because it's not a portfolio. It's a lot of sub-portfolios that add up to it. So I think where the industry needs to be cautious is obviously central business district office. That is, again, probably not as much of a deal in the next 12 months, but over the next 24 or 36 months, that's the asset class to really pay attention to. And it will be an evolving story. And we're spending a lot of time focused on whatever little of that we have Now it helps us tremendously being in Florida where, you know, everything is getting absorbed in Florida. But in markets outside of Florida, New York for us, for example, and for other banks every other part of the country, that's the asset class that you want to pay attention to in the medium term. I think in the short term it's not really an issue. But outside of that, you know, Retail has been a perpetual issue for banks. I think for the most part, banks have put that behind them. And multifamily warehouse industrial is still doing very well.
spk01: Yeah, I would add we're super asset allocation focused. When we think about the real estate portfolio, we've got a very disciplined approach to thinking about what sectors, geographies, and asset classes we take exposure in, and even the broadest of categories, as Rod said, really have multi-categories. So an anchor, a grocery store anchored center in Boca Raton is very different than retail that might be a Tom Ford store on Madison Avenue and 63rd Street. That's very different kinds of retail. But we think pretty highly of the quality of the real estate portfolio that we have. And I think when we look at exposures across the platform in areas where we think there could be some softness, we feel really good about what our exposure levels are in those categories. Okay.
spk00: All right. Thank you for the help. Appreciate it.
spk06: Please stand by for our next question. Our next question comes from Will Jones with KBW. Your line is now open.
spk09: Hey, great. Thanks for letting me jump back on, guys. Just a quick follow-up. I wanted to hit on the buyback. You know, I know, you know, by our math, you guys, you know, had massive buybacks this year, somewhere around 12% of the company repurchased in 2022. Raj, if the stock, you know, kind of hovers around the current levels, do you plan to keep the gas on the buyback here? And then, you know, just as it relates to your capital, I know you guys don't look at PCE as much, more so common equity, tier one at the bank level. Do you have any internal, you know, targets or any internal thresholds where you would want to see that, you know, ratio draw down to? Thanks.
spk05: Yeah. So, yeah, we are active. You know, the price of the stock is at right now, it's a no-brainer from my perspective. And in terms of what ratios we look at, you know, set one. I actually got Leslie answer that.
spk02: Yes. Yeah, we are more focused on set one. You know, a couple of things we think about when we think about capital levels. You know, we are very protective of the company's investment grade rating. So we're very conscious of the ratings agency's view of buyback. We also want to be sure we're retaining sufficient capital to support growth that we see on the horizon. So those are the two constraints we think about. Our board is probably going to meet in the next month or so to approve our actual capital plan for 2023. That hasn't happened yet. Currently, I don't anticipate any changes in the way we think about capital targets, but I'm going to refrain from putting them out there until that capital plan gets finalized. But I don't anticipate anything changing. I would not anticipate that the capital targets that we've laid out in the past would change, but I don't know that with certainty until the board meets.
spk09: Okay, that's perfect. Thank you.
spk06: At this time, I show no further questions. I would now like to turn the conference back to Raj Singh for closing remarks.
spk05: Thank you. Appreciate all your questions, all the back and forth. We're here. Leslie and I are both here if you have any follow-up questions. But again, thank you so much for joining us. We'll talk to you again in a few months. Bye.
spk06: This concludes today's conference call. Thank you for participating. You may now disconnect.
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