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spk03: Good day and thank you for standing by. Welcome to the Bank United second quarter 2023 earnings conference 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 one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded And I would now like to hand the conference over to our speaker today, Susan Greenfield. Please go ahead.
spk02: Thank you, Latonya. Good morning, and thank you for joining us today on our second quarter 2023 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 reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries around 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 external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be 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 31, 2022, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K which are available at the SEC's website, www.sec.gov. With that, I'd like to turn the call over to Raj.
spk01: Thank you, Susan. Welcome, everyone. Thank you for joining us. Ninety days ago when we last spoke to you, I was just thinking of it this morning. The day before our last earnings release, Leslie and Tom and myself, we were huddled in a room. and doing dry runs of what the earnings release would be like. I think we did two dry runs, which we've never done before, but we did those on that day. Every question that people possibly asked, we wanted to be sure. We were prepared with the answers. We have all kinds of data available to us at our fingertips so that we could answer all your questions at that time. Compare that to yesterday. Tom and I were at a golf outing for our top clients where we had a great day. We did leave Leslie back in the office, but that's more because she doesn't like golf. But 90 days can make a big difference. So we're happy. We were able to entertain all our clients, and life has sort of gone back to normal. The day of earnings last quarter, actually that day or maybe the next day, I called a senior leadership team meeting and the top 10, 12 people in the company, we huddled together in a conference room for half a day and we did something which we rarely do with the company, which is we actually had a short-term strategy session. We always talk about long-term strategy, but that day we said, listen, the environment that we're in, now again, reminding you, this is late April, we said, okay, we're still in a tense environment. The worst may have passed, but maybe it hasn't. what are the things that we could do in the short term, sort of very tactically, and short-term defined as in the next quarter or two that will improve the standing of the company. And it was a whiteboarding session, and we started writing things on a whiteboard, anything that came to anyone's mind, you know, things like let's – and it was a metrics-driven conversation. you know, let's improve our loan-to-deposit ratio. Let's improve our total deposits. Let's pay down FHLB borrowings. Let's start an expense management program. Let's improve liquidity coverage. Let's improve our uninsured deposit levels, and so on and so forth. And we wrote down a whole bunch of things. Of course, somebody said, okay, let's make sure credit remains pristine. And we put all of that on a whiteboard, and we stared at it collectively for a period of time and said, okay, Some of these things are things that we should be doing all the time anyway, but what are the most actionable things that we can achieve in a matter of a couple of months or a couple of quarters? And we made a laundry list, and that became sort of our short-term, I don't even think it's really strategic. It really was tactical. And we started executing on all of that. Standing here exactly three months from that and reporting our second quarter numbers, I'm very happy that we've actually hit pretty much all of those metrics have been laid out for ourselves. We improved liquidity. We improved capital. We grew deposits. We improved our loan deposit ratio. We ran down our mortgage book, our securities book. We paid down FHLB. And I'll talk about margin. While margin came down this quarter, we stabilized that as well. We'll talk about that in a little more detail in a few minutes. So I'm pretty happy where we are in a very short period of time. Last quarter, I had made a comment that, you know, the first quarter could be viewed really as two different sort of timelines. It was everything from January 1st to March 10th, and then everything from March 11th to the end of March. This quarter, if I was to try and do the same, there wasn't that much of a clear demarcation, but I do feel the first half of the quarter felt very different from the second half of the quarter. And and going into July, you know that has continued And and things feel fairly back to normal. So I'm happy about that a quick quick comments about The environment, you know things that we don't control but we react to so first and foremost the economy The economy is very resilient so I'm kind of like tired of saying this over and over on every call and But that's how we see it. We don't see the stresses that we're all afraid of showing up anywhere in any of our geographies. So the economy is strong and resilient. Florida is twice as strong as the national average. If you look at Florida's GDP, unemployment rate, and so on, unfortunately that also means inflation is much higher in Florida than the rest of the country. But the economy is very resilient. On the rate environment, it does feel like the Fed is very much at, you know, I think they will raise rates. That's what the street is pricing in. But given where CPI and PPI data is, it does feel like we are very close to the inflection point on Fed policy. So that's good. And the banking environment, generally speaking, while it has improved tremendously from the chaos of three months ago, it is still a challenging environment and challenging for the reasons of the curve being inverted and the competition for deposits still being very intense and still some concerns about the economy eventually slowing down or faltering. It's still that is an expectation out in the future. It's not here and now. With that, let me quickly go over some of the numbers. Leslie and Tom will both do a deeper dive. I'll run through these quickly. Net income came in at $58 million, 78 cents a share. I think that's right on top of consensus from what I checked a couple of days ago. Deposits grew by $116 million. NIDDA went down, but only by $62 million, which is a big improvement over the big declines that we've seen in non-interest DDA over the course of the last many quarters. So our ratio of non-interest DDA to total deposits came in at 28.3, relatively stable to what it was in March. I think it was 28.6% at that time. Loans declined by $263 million, but the largest portion of that was residential, which we had gotten residential heavy, as you know, in the last couple of quarters, mostly after the pandemic. So taking that down was a very deliberate decision by us. So total loans declined by $263 million, but resi was $184 million off that $263 million. Securities portfolio, also, we let that run down. That's also larger than what we needed to be. It came down by $390 million. On the other side of the balance sheet, we did pay off FHLB advances to the tune of $1.6 billion. Margin was 247 for the quarter. Now, that's a decline from 262 last quarter, but I want to make a finer point here. Last quarter, when we looked at our margin, Our margin was declining from January to February, from February to March. It was coming down, and we ended up overall for the quarter at 262. This quarter, we entered this quarter at 247, and we ended this quarter at 247. So relative to last quarter, where this was coming down hard and fast, this quarter, while it was lower, it felt a lot better because it was stable. So I'm happy about that. Cost of deposits increased to 246. That was compared to 205 last quarter. I think the increase this quarter was 41 basis points. Last quarter was more. It was 63 basis points. So slight improvement on at least the velocity with which deposits are repricing. And on the credit front, quickly, there isn't really much to talk about because everything is fairly stable. NPAs were 34 basis points. If you exclude the SBA guaranteed loans, then there were 24 basis points. I think that's two basis points higher than last quarter. Charge-offs were nine basis points, very much in line with last quarter. In fact, compared to last year, I think last year we were averaging 22 basis points, so much better than last year. So on the credit side, there isn't much of a story. Obviously, everyone is focused on office CRE. Our total CRE levels are fairly low compared to our peers. And I'm defining peers as sort of banks between 10 and 100 billion. What we did last quarter also, we gave you a lot of information on our office portfolio. This quarter, we've given you even more information. We are spending a lot of time looking every which way possible in this book to see if there's any trouble. This is not something that is causing us any kind of heartburn. So this is a very good portfolio. A large part of the exposure is Florida, and whatever exposure we have in New York City pristine. I mean, it is really hard to poke holes in this portfolio. So as of right now, this is not what we're losing sleep on. So lastly, just a comment about capital. I said at the beginning of the call, we also improved our capital position, not because we needed to, but in a time like this, in volatile time like this, more capital is always better. Our set one improved, our tangible common equity ratio improved by 30 basis points. So overall you know tangible book value increase and and and so on so overall I you know our collective blood pressures is down a lot in the last three months and that's a good thing and and I would say that we're basically back to doing you know and executing on the long-term plan that we'd already set out for ourselves So, and I hope it stays like this, and we can come back to you in 90 days and talk more about the progress you've made on that front. But I will turn it over quickly to Tom, who will go a little more detailed into the numbers.
spk06: Great. Thank you, Raj. So, first on deposits, again, in aggregate, deposits were up $116 million for the quarter. NIDDA, as Raj mentioned, was down $62 million. Non-maturity interest-bearing deposits were down 92 million, while time deposits were up for the quarter by 270 million. I think the biggest kind of impact on deposits in the quarter was we have a large government municipal portfolio. It's a seasonal portfolio. That was part of the $378 million decline in that book for the quarter, which we expected, and that will kind of come and go up and go down as tax collections happen and whatnot. In terms of new business, we have a very solid line of sight into new business coming through our treasury management operations platform in our systems. We track it in various stages and have about $1.6 billion in deposits that are operating type deposits running through our treasury products that we expect to realize over the next couple of quarters. There's always some timing difference, especially in bilateral relationships and middle market relationships with onboarding. But overall, the deposit book from a pipeline perspective looks very, very strong. As discussed on slide eight of the deck, our largest deposit vertical is in the title solutions business with total deposits of $2.7 billion. As of June 30th, this is predominantly in operating accounts. It's over 700 accounts and grows by 30 to 40 accounts per quarter, and we feel very good about that. There are no other industry verticals with deposits over a billion dollars as of June 30th. Loan to deposit ratio ended the quarter at 95% compared to 97% on March 31st, and we would like to continue to improve that and bring it down into the low 90s over time. So a little more detail on the loan portfolio. As Rod said, the overall portfolio is down $263 million. For the quarter, we kind of have, and I'll talk about this as we go through these numbers, sort of what we view as the core portfolio, which I would call kind of corporate banking, commercial banking, small business banking, and CRE. And then we have some other national businesses that have more volatility, and some of those are trending down, as Rod mentioned, the residential portfolio. And BFG, you know, has been trending down for a period of time. So, I'll break some of my comments into where we expect core growth versus other areas that, you know, we will likely see edge down, you know, over time. The CRE portfolio was up $24 million for the quarter. CNI was down $73 million. Pinnacle up $32. Franchise finance and equipment finance continued to go downward, and we expect that to continue to happen over the next couple of quarters. Pinnacle will likely be fairly flattish to down just seasonally, again, in their sector over the next couple of quarters. Pipelines in the core areas remain very, very strong over the next two quarters. Average rate on new production for the quarter was about 8% for the CNI portfolio and about 7.6% for the CRE. And most of the things that we're seeing in The pipeline in both segments are north of SOFR plus 300. I would say we're seeing many things in the 325 to 350 range. Overall demand is good and pricing is good and attractive across most of the market segments that we're in and most of the geographies that we're in. Consistent with our strategy of de-emphasizing non-relationship credit business, We have strategically exited about $75 million of shared national credits, 175 of shared national credits last quarter. We will continue to look at doing that kind of opportunistically over the next couple of quarters as we try to shift business, some business that we did during the pandemic period of time when we had, you know, some more shared national credit exposure and now shifting it into more relationship and deposit-oriented business. So, I'll take a few minutes to speak about the CRE portfolio. As Rod said, I know there's a lot of interest in this. Slides 12 through 15 of your deck give some additional disclosure on this. Overall, the CRE portfolio is very high quality. As Rod said, it's about 23 percent over the overall loan book, which we feel very comfortable at that level. It's well-positioned, high-quality, low LTVs, attractive debt service coverage ratios. Sixty percent is in Florida. As Rod said, the demographics continue to be extremely strong in Florida. I just finished up this month kind of a tour of different offices and different markets, and I can tell you Florida ranges from very good to sizzling, and I don't mean the temperature. Depending upon, you know, that's sizzling too, actually. But whether you're in, you know, Orlando, the suburban markets in Orlando, the Tampa market is extremely strong. Miami, you read about every day in every publication in terms of what's going on in that market, in terms of new to market and net absorption. You know, we see tremendous new to market movement into Fort Lauderdale and Palm Beach, you know, unemployment rates in most of the Florida markets. are in the mid-two range. So, you know, you're seeing dramatically better economic metrics in Florida, really, than, you know, than anywhere else. At June 30th, the weighted average LTV of the portfolio was 57%, and the weighted average DSCR was 1.88. About 16% of the Cree portfolio matures in the next 12 months. About 7% both matures in the next 12 months in this fixed rate. which includes swap loans, which are fixed to the borrower. So at everybody's favorite topic, office, as Raj said, we feel really good about our office portfolio. We look at every loan, every quarter. We have a very high level of analytics running through the entire portfolio, which is just less than $1.9 billion, about $1.85 billion. The weighted average LTV of the office portfolio was 66%. Weighted average DSCR was 1.6 on June 30th. There's additional breakdowns in your supplemental deck on 12. Substantially, all the office portfolio was performing. In the entire portfolio, we had $313,000 in non-performing loans, and 95% was pass-rated as of June 30th. Fifty-nine percent of the office portfolio is in Florida, where the demand and demographics, as I mentioned, continues to be high. Very favorable, and there's breakdowns on the Florida and New York tri-state portfolios in the package. Substantially, all the Florida exposure is classified as suburban. It's well diversified across all of the major markets that we're in in Florida. And with respect to the New York portfolio, we have $181 million or so in loans in New York City and Manhattan specifically, where obviously that's a center point of attention. They're kind of spread all over the borough of Manhattan. They're all well-performing properties. And as I mentioned in the last call, they're all to long-term sponsors, not fund-related business. And they're all to sponsors that have generally owned these properties for generations and have very low basis in the properties. Our portfolio in Manhattan is 94% occupancy rates and has a 5% 12-month lease rollover. So that we feel about as good about a portfolio as we could possibly feel about the overall office portfolio. As I said, we've stepped up our level of analytics substantially in the book over the last couple of quarters. And I can almost say we are intimately familiar with every single loan in the portfolio. So with that, I'll turn it over to Leslie.
spk04: Thanks, Tom. I'll get into a little bit more detail about some of the numbers. As Raj said, the NIM for the quarter was 247 compared to 262 last quarter, so down 15 basis points. And I'll reiterate what Raj said, that the NIM has been stable this quarter month to month. April was the same as May, as the same was June, so we're very happy to see that stability. The decline in NIM is mainly due to the mixed shift on average in funding. We saw average deposits down 794 and average FHLB advances up 680 million. And that just all reflects the impact of the events of March. And you saw all of that stabilize considerably and deposits come up and FHLB come down by quarter end. The cash levels we held were up on average by about $300 million for the quarter. And all of that taken together, we estimate had about a nine basis, accounted for about nine basis points of that decline in NEMS. And again, we saw some improvement in stability towards the end of the quarter. Cost of deposits was up 41 basis points from 205 to 246. And the rate of increase in deposit costs slowed this quarter. Cost of total deposits was up 41 basis points this quarter compared to an increase of 63 basis points last quarter. So we were happy to see that. The average cost of FHLB advances increased from 427 to 459, again, reflective of the the additional wholesale funding we had to put on the balance sheet in March. Looking forward, I would say we saw stability in the NIM during the quarter. Our best estimate is we will continue to see that stability. Obviously, we're making assumptions there about deposits and depositor behavior that in this environment are very difficult to pin down, but our best estimate is that we'll see stability in the near term in the NIM. A few comments on liquidity. About 66% of our deposits are insured or collateralized at June 30th, up from 62% at the last quarter end. Same day available liquidity at June 30th was $14.7 billion, up from $9.4 billion at March 31st. And the ratio of available liquidity to uninsured deposits was up to 167% at June 30th from 95% at March 31st. So all positive trends there. The provision for credit losses this quarter was $15.5 million, and the ratio of ACL to loans increased from 64 to 68 basis points. This quarter's provision just really was impacted by the Moody's baseline economic forecast being a little less favorable than it was in the prior quarter, and we also placed a little bit greater weight on the downside scenario in our modeling just to recognize that there is still some risk of you know, a recession coming. We had some shift from the qualitative to the quantitative portion of the reserve this quarter. You'll see that in our slide deck as we are now capturing in the modeling with the weighting of that downside scenario some of the economic uncertainty we had previously been capturing qualitatively. Reserve on Cree office was up to 83 basis points at June 30th from 56 basis points at March 31st. We did add something qualitative to that reserve this quarter just in view of the uncertainty that's out there, but I echo what both Tom and Raj have said, that we really feel very good about the quality and potential loss content, if any, in that office portfolio. We've also added some stress testing results to our slide deck this quarter based on the CCARDS severely adverse scenario. I thought that that would be interesting to you guys. In the CCAR severely adverse scenario, lifetime expected losses on the loan portfolio in the aggregate were projected at 2.2%. That's 3.3% for CRE and 4.7% or a total of $90 million for CRE office. And that, again, I remind you is in the CCAR severely adverse. In the Moody's S4 recessionary scenario, projected losses for office were only 1.7% or $45 million. So that's a portfolio that's projected to perform extraordinarily well even under a period of hypothetical severe stress. Fluctuation in non-interest income compared to the prior quarter, the biggest driver there was $13.3 million in the prior quarter of losses that we took on some preferred equity investments that did not recur in the current quarter. And in the non-interest expense category, we saw compensation and benefits down primarily due to normal seasonal fluctuations in payroll taxes and benefits. And we also saw last quarter, we recognized $4.4 million in operational losses that didn't recur as well. We think probably in the terms of guidance about expenses, we think the second half will probably be flat to the first half. in terms of total non-interest expense. With that, I will turn it over to Raj for any closing comments that he wants to make.
spk01: Oh, I think we should go straight to Q&A.
spk03: Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
spk00: And one moment for our first question.
spk03: And our first question will come from Brady Galey of KBW. Your line is open.
spk10: Hey, thanks. Good morning, guys. Morning. So I just wanted to start with the margin. You know, I heard your guidance about how near term you expect the margin to be stable. But I would think with the balance sheet of Bank United, once the Fed hits the terminal rate deposit cost, are steady, you'll still have some loan repricings going higher. Is there a scenario that maybe in the medium term you could see NIM expansion?
spk04: Yeah. Brady, there's a scenario even in the near term where we could see NIM expansion. It all depends on stability of the deposit base. The stable NIM guidance that I gave is predicated on a relative a slight decline in NIDDA and a flat deposit scenario. So if we are more successful than we think we'll be or if we're more successful than that or as successful as we think we can be in growing deposits and keeping NIDDA stable, there is some potential upside. But, you know, that's all dependent on what we're able to do on the funding side, Brady.
spk10: And then loan growth, you know, has been pretty flat in the first half of the year. Is that what we should think about for loan growth for the back half of the year as well, just not much of it?
spk06: Yeah, I would, from the core growth perspective, we expect to see growth in the CNI book. You know, we expect to see growth in the CREE book. Some of that will be shifted out of RESI and, you know, BFG. We expect Pinnacle to be fairly flat. So it'll be kind of the core part of the book that is a better yielding part. I think we'll be growing for the second half of the year, grew slightly in the first half of the year. I think we'll see accelerated growth in the second half of the year. But that will be offset by exiting other, you know, loan assets that are lower yielding assets. But we expect to see, obviously, a yield pickup in doing that.
spk10: All right. And then finally for me, just on the share buyback, you know, it doesn't look like you guys repurchase any stock in the second quarter. I know historically you had been a big stock repurchaser, but maybe just updated thoughts on the buyback headed to the back half of this year.
spk01: We stopped our buyback back in March. I think we may have a little bit left in the authorization, but we're not buying back stock. We will discuss with our board as we do in the ordinary course. I think the board meeting is in a month or so. And, you know, we've gone through some pretty volatile times. So I think it was the right decision to halt. And at some point in the future, the board will decide to reengage, but not right now. Okay. All right, great. Thanks, guys.
spk00: One moment for our next question.
spk03: And our next question will come from Jared Shaw of Wells Fargo. Jared, your line is open.
spk02: Morning, Jared.
spk11: Hi, good morning. This is Timor Braziler filling in for Jared. Okay. Do you hear me?
spk06: Yes.
spk11: Sorry about that. Maybe just starting on the credit, the increase in special mentions. I know you're... Talked about your comfort in the commercial real estate book. And maybe just talking about the C&I portfolio and more generally, what are some areas that you could end up seeing more stress if it's not coming out of the free book?
spk04: I would say, first of all, that the increase in special mention was really, there's no correlated risk there. We've done obviously a deep dive. We know what each of those credits are. And there's no correlated risk or anything systemic in a particular sector of the book there. We aren't concerned about lost content in those particular credits at this point in time. We put them in special mention for some additional monitoring because they're under a little bit of stress, but we aren't concerned about lost content in those particular credits at this time. And we saw the substandard category actually come down this quarter. So we feel like credit's holding up pretty well, and we're not seeing anything of systemic concern.
spk01: The larger loans that we downgraded at the end of the quarter, it's already paid off.
spk04: Yeah, and that's in the earnings release.
spk01: That was a $22 million exposure. Not exposure, outstanding. Yeah, UPV.
spk06: It was a $50 million exposure.
spk01: Sometimes the timing doesn't work right. I wish that paid off on the last week of June, but it waited until I think the 12th or 13th of July when it paid off.
spk06: Yeah, we actually had a couple of payoffs after quarter end. I would echo what Leslie said. I mean, there's a couple of idiosyncratic moves this quarter. We expect to see those come back, but there's no underlying. Each was from a different industry sector. There was no two in any one industry sector. And our C&I book tends to be extremely wide and well diversified across 100 different industry segments so uh and as i mentioned and rod said we saw two of those pay off after the end of the quarter um and there's no particular sector we're really you know concerned about the health of the consumer looks good and none of it was commercial real estate right none of it was commercial real estate okay and then maybe just parlaying that commentary into the allowance i mean you guys have been pretty efficient in how you run the bank from an allowance standpoint
spk11: And I appreciate the waterfall on kind of the quarter to quarter changes. But as we look out going forward, the overlays that were applied in the second quarter, you know, what would need to happen in the back end of the year to continue seeing reserve build? And is that kind of implied in your modeling as we get closer to whatever the recessionary period might look like?
spk04: Again, the thing that would lead to reserve build is if broadly the view of the future of the economy deteriorates. I personally don't expect that to happen, but I could personally be wrong. So that would be the thing that would really lead to reserve build, is if we saw deterioration in not only actual economic conditions, but forecasted economic conditions. That would be the thing that would lead to significant reserve build. You'll also see some reserve bill just happen naturally as the composition of the portfolio shifts from residential to commercial because the commercial portion of the portfolio carry higher reserves than the resi portfolio. So some of that will happen as well.
spk11: Okay, that's good color. And then switching gears, just looking at the DDA stability, that was encouraging to see in the second quarter. I know you talked about some of the municipal balances that are a bit seasonal in nature, but how should we be thinking about DDA balances going forward? Is there actually an outlook where you can see DDA?
spk02: Can you tell us?
spk01: Let me try after that. So in the relative state stability you saw in DDA, I want to, you know, that's the net number. The gross number is different, and the reason is that movement of money out of DDA into money markets, or in our case, very often it's that money getting used for whatever it gets used for, right? Somebody buys a building, somebody buys another company, somebody expands a warehouse. That's what happens. It's not that people, you know, there's certainly movement into interest-bearing as well. But a lot of that movement is something, you know, the whole industry has been suffering from now for a better part of a year. That is still happening, right? It's not like suddenly the 28% DDA we have, all these people decided to just stay. The reason the number was stable is because whatever left to go into other places got replaced with new business that we are doing and the pipeline that we talked about at the last fall. Now, that is a pretty big deal given the environment that we were in, especially in the first half of the quarter, to actually keep executing on the sales strategy of bringing in new business. Tom mentioned the title business, so I'll just talk about that. We brought in 35 new relationships this quarter. We brought in 35 new relationships last quarter. I may be off by one or two, but roughly that. And that was the velocity of new business in the fourth quarter last year and in the quarter before that. So the fact that we haven't missed a beat despite the distraction in March and April, that is actually the real story here. And without that, I don't think we would have been able to hold the DDA steady. It really is trying to fill the bucket. faster than the natural attrition that is happening. That natural attrition will eventually slow down, but it is still happening, and we really just have to run harder and faster on the treadmill to stay ahead of it. Great. Thanks for the call.
spk00: One moment for our next question. And our next question will come from David Rochester of Compass P. Your line is open.
spk08: Hey, good morning, guys. How you doing?
spk04: Good morning, Dave.
spk08: On the margin front with the stability you guys are looking for, I was just wondering what that means for NII going forward if you're looking for stable levels there. And then on the deposit pipeline you mentioned, the 1.6, I was wondering what portion of that was not interest-bearing. Do you want to take the first part?
spk04: So I would say on the NII outlook, again, Dave, it depends on the success that we have growing deposits because we are in the short term focused on reducing the wholesale funding level. You saw some of that this quarter. And so earning asset or loan growth will come from deposit growth. So I think if we are able to achieve net deposit growth, that will generate net loan growth, which will then, you know, lead to NII growth. And I'm not trying to be evasive. I just think deposit growth and depositor behavior is very hard to predict right now. We think we can succeed in growing deposits. That's what that depends on. The $1.6 billion, Tom, you want to comment on that?
spk06: Yeah, I would say when you look at that, Dave, since that is what's coming through the pipeline in our treasury management team, that's largely operating NIDDA accounts.
spk08: Great. Okay. And then on the expense front, you guys had mentioned an expense management program when you were talking about that whiteboard at the beginning of the call. I was just wondering what you guys were thinking about on that front and what the chances are you could actually see lower expenses in the back half of the year versus the first half.
spk01: I would say flat expenses. So from here on, over the next couple of quarters, you shouldn't expect expense growth. And that, again... In an inflationary environment, that doesn't happen by itself. It happens because of all the things that we've been working on for the last two months that are being put into motion as we speak.
spk04: And I will say we are still investing in certain parts of the business. You know, we're still hiring producers and investing in growth opportunities. So, you know, we have not gotten to the point yet where we want to do draconian things and cut things off that we didn't have to turn around a year from now and figure out a way to rebuild. Yeah.
spk08: All right. Great. Thanks, guys.
spk00: One moment for our next question.
spk03: And our next question will come from Steven Alexopoulos of JP Morgan. Your line is open.
spk07: Hey, good morning, everyone.
spk03: Good morning.
spk07: Good morning, Steve. I want to start on the loan side. So the pace of residential loan runoff was a bit elevated in the quarter. What explains that? Do you think runoff will continue at the pace we saw at 2Q?
spk04: I think the reason the pace was accelerated was because in the first quarter we still had some committed pipeline that we were putting on. I don't think there's been really any change in the rate of amortization. The prepace speeds are extraordinarily slow. flow, as you can well imagine. So it's really just amortization that's going on.
spk01: Steve, we did not do anything inorganic. It's not like we sold anything. It's just that we tightened up the new originations, and that took effect in the quarter, which is what you saw. So yeah, second half of the year, it should stay at similar speed. People forget, a large part of our portfolio, we do have in one of the slides, you know, is arms and hybrids. And, you know, I think only 30% or so of our portfolio is fixed, a 30-year fixed. So it does have a better CPR than most people think. And it runs off, which is a good thing in this environment. So we do expect more runoff in the third and fourth quarter. We do expect some runoff in the securities portfolio as well, maybe not as much as we saw this quarter. But, yeah, those trends should continue.
spk04: Yeah, I would say, based on what we know today, that resi portfolio will probably run down by another 450 between now and the end of the year.
spk07: Got it. Okay, that's helpful. On the commercial side, given that your core markets are fairly vibrant, I mean, you sound pretty optimistic on the call, why are you seeing stronger commercial loan growth here?
spk01: Again, the devil's in the detail. On one hand, we are growing core business, but we're also letting go of non-core or what I would call credit-only business, like the $175 million in SNICs, as an example, or some of the leasing business that we've been running down for now several quarters of the franchise business we've been running down. The core business that we want to grow, which comes with deposits, is growing healthy. Actually, even in New York, it's growing. What is not growing or shrinking is the stuff that is transactional.
spk06: Yeah, and I would also add, Stephen, that when there are opportunities in that sort of back book of shared national credits or other things that fall into that category, you have to exit opportunistically. Right. Your middle market business kind of builds over a period of time. We're seeing a good quarter so far this quarter in terms of closings and fundings and new originations and things of that nature. But those come on, you know, over a period of time where some of the share national credits, you know, they don't necessarily mature, but you get an upsizing opportunity or you get a redial of that deal or it comes where it's going to come within 12 month period of time. And you have the opportunity to exit at that period of time, and we're taking advantage of those opportunities to exit. So that $175 million of deals that we got out of in Q2 will be a strategy that we will continue to think through in Q3 and subsequent quarters is how we can redirect that effort into higher generating bilateral loans that come with deposits in TM business.
spk07: Should we expect net commercial loan growth in the second half?
spk06: Yes.
spk07: Enough to offset the 450. Leslie, where we'll see flattish loans, will there be enough?
spk04: Yeah, I think so, Steve.
spk07: Okay. Then final question. Raj, in terms of getting back on offense here, back to the long-term plan, I feel like when you launched Bank United 2.0 the industry had their eye off the ball in terms of non-interest bearing deposits now everybody's trying to grow and retain non-interest bearing deposits do you re-enter the market with the same playbook like what's your ability now to actually improve I know the pipeline is fairly strong right now but it's a totally different environment today than where it was even a year ago yeah listen you know
spk01: The most common question that I get from investors is, you know, where will NIDDA as a percentage of deposits end up when all the dust settles over the course of next year or two? Because everyone has backed off from, yeah, we were at a high of 32 and we're down to 28. You know, and I've heard some, you know, bizarre projections, let's call it that, that, you know, you'd go back to 2019 levels. Some say you'll go back to 2008 levels. I can remind them we didn't exist in 2008, so I'm not sure we'll go back to that level. The prior bank only had $50 million in DDA when we bought it, so I'm 100% certain we're not getting there. But, you know, stabilizing DDA and doing that through new business, that is probably the most important thing when it comes to building long-term value, and even short-term earnings, by the way. That's the key driver. So we're focused on that billion six pipeline more than we're focused on anything else and executing against that. The long-term plan still goes right through building a better deposit base than what we have. Not only better, but also bigger, right? we want to take down FHLB more, have more core business, grow more of the core bank, need more funding to have a bigger loan book. We don't want to run the bank over 100% loan-to-deposit ratio. I've been very vocal about that. We're happy we've created a little more breathing room for ourselves this quarter, but if I can create even more breathing room, that's even better. We don't need to be at 80%, but I don't want to get close to 100% or over 100%. So, you know, the long-term strategy doesn't change that often. You know, if it changes that often, then it's not a very long-term strategy. Then it's tactics. So we just want to put the noise behind us and get back to executing what we're executing. Yes, environments change. Interest rates go up and down. Economies go up and down. But long-term, you still got to, you know, the North Star really hasn't changed the work we're trying to build.
spk06: Steve, I would add a couple of points to that as well. When you think about execution strategy, one would be a word that Raj used, which I would say is intense focus on doing it. I think the second you probably may have picked up, we added a number of quality producers in the last quarter. So as Leslie alluded to, we continue to invest in the talent base of people that came from really excellent banks, that have business that they can bring to us that we have added to the talent base in the commercial areas all year, really, particularly over the last quarter. And the third is the continued investment in technology-driven cash management-type programs, API connectivity, payables and receivables, integration opportunities. So it's focused people and product that are going to be the three things that are going to get us there.
spk07: Thanks for all the color.
spk03: One moment for our next question. And our next question will come from Brody Preston of UBS. Your line is open, Brody.
spk05: Hey, good morning, everyone. Morning.
spk03: Morning, Brody.
spk05: Hey, I just wanted to ask real quick on the securities yield. I think it was 65% to 70% floating rate, Leslie, is what I had written down. And so the yield came up a little bit less than I was looking for. I was hoping maybe you could give me some details as to why.
spk04: Yeah, it is about 68% floating. And Brody and I don't have all the exact numbers around this with me, but there are some securities in the portfolio that hit caps And so that's why that trajectory came down a little bit.
spk05: Got it. Okay. Okay. Thanks for that. And then I did want to ask just on the the spot rate on the, the interest bearing deposit costs, it didn't look too terribly far off as to kind of where, you know, the average would say you would, you would end the quarter. And so I guess when, when you look at the trajectory going forward on the interest bearing deposit costs, you have a sense for, for, you know, what the expected step up is within, within the margin guidance that you gave.
spk04: I mean, Brody, it is going to, it is going to step up again. I think, you know, without question next quarter. You know, the time deposits are rolling. You know, so far the all-in, you know, beta, including CDs, I think through the cycle is a little over 50%, and I think that is going to be a little bit higher before we get to terminal rates. So it is going to go up again.
spk05: I also wanted to ask on the non-interest bearing. When I look at the average balance sheet in the period end, it sort of implies that you had some strong growth in NIBs in the back half of the quarter, Raj, or maybe this is for Tom. Could you maybe help me understand what drove the rebound in non-interest bearing in the back half of the quarter? Was there anything seasonal that drove that, and should that kind of stick around going forward?
spk01: I don't think there was anything seasonal.
spk00: No, I don't think so.
spk01: No. We do have fluctuations sort of month-end versus middle of the month that is a pattern to the deposit flows, but that's always there in every month. I think it's just a sales cycle when some deals happened or didn't happen and when we boarded people onto a system. There's nothing unique about worth mentioning.
spk06: I don't know, Tom, if you... No, I don't think... No, I would say normally you see a trend of corporates wanting to build up some liquidity at quarter end for financial reporting purposes, but other than that, really... I don't think it's anything unusual.
spk04: But it is true, the back half, I do think we saw a stronger... onboarding of new accounts in the back half. The beginning of the quarter was, as we all know, a pretty weird time.
spk01: Maybe that's what it was probably.
spk04: I don't think in April anybody was thinking about moving their deposit relationship from bank to bank. I think that probably had something to do with it.
spk06: As Rod said, the quarter was really two quarters within a quarter. The first quarter was still kind of recovering from the first quarter and the second part of the second quarter was starting to get back to
spk04: Normal sales cycle.
spk06: Business is normal.
spk04: Yeah.
spk05: Got it. Okay. And then, Raj, just within the DDA book, the title solutions at $2.7 billion, that's obviously the largest segment that you have, and I think was a zero-deposit business back in 2018. But you've spoken before about other non-interest-bearing companies. uh deposit businesses that you know that you've grown sort of since then i know that nothing's over a billion but i guess i wanted some more detail you know beyond title solutions what are what are some of the other areas of success that you've had building non-interest bearing deposits over the last several years um you know they're kind of different i guess maybe different than just the excess non-interest bearing deposit flow that the industry saw during covid yeah
spk01: So the title, just to clarify, the title is not all DDA. It is majority DDA and has a very low cost of funds. So it's operating, but there's always some money markets that come with it. Likewise, you know, the other business I would point to is the HOA business, which we also built over the last few years, which is also around a billion dollars. Again, very, you know, nice amount of DDA, but some money market as well. And that's also growing very nicely. They're already having a great year. I think they already met their year-end goals by June, so pretty solid year for that team. And there are some other businesses that we're investing in that we haven't launched yet. I don't like to talk about them for competitive reasons, but we are always experimenting and tinkering with other sort of niches that are out there. Sometimes they're successful, sometimes they're not. But these are small investments that we make all the time. We're spending a lot of time and focus on one right now, which will probably bear fruit in maybe two or three years' time, much like the title. You never heard us talk about the title business in 2018 or 19 when we were busy building this. You know, HOA and the title are sort of the two most prominent ones. But, you know, there'll be more to, hopefully more to share with you in a couple of years.
spk05: Got it. And then last one for me, just real quick. We've seen a few banks, you know, sell some office loans this quarter. And, you know, depending on, I guess, what type of office building it's been, we've seen a pretty wide range of outcomes. And I know the book is performing well for you, but, you know, you've never been afraid before to kind of strategically exit something. And so, you know, is there anything within the portfolio you look at and you say, you know, maybe it makes sense to, you know, do a loan sale, you know, here or there?
spk04: Brody, I don't see it selling any of that portfolio at a discount. We like the portfolio. Yeah.
spk05: Thank you guys very much for the questions. I appreciate it.
spk03: One moment for our next question. And our next question will come from Christian Degrassi of Goldman Sachs. Your line is open, Christian.
spk12: Hey, good morning.
spk04: Good morning, Christian.
spk12: So just another follow-up on the $1.6 billion pipeline, what type of customer demographic and geography is this coming from? It just seems that deposit competition is as fierce as it's ever been right now, and that's like a really valuable, you know, amount. So where are you really seeing this opportunity?
spk06: Yeah, I'm going to give you a strange answer. It's everywhere. You know, it's all over our geographies. It's It's within HOA, as Raj mentioned. It's within the title solutions areas, within C&I, small business, core middle market. It's in all of the geographies that we work in, New York, Florida, Atlanta. It's in a lot of places.
spk01: I want to clarify. This doesn't mean that $1.6 billion of growth is going to happen this quarter. Correct. This is a pipeline. It takes two to three quarters to execute.
spk00: And it won't all go through.
spk01: It won't pan out as well. It is, but it is, these are not like, you know, I think I have a name of somebody that I might call who might give me deposits. This is people who we have proposals out and have at least a handshake and are in some, somewhere in the pipeline, either accounts are open or or, you know, treasury trading is happening or, you know, we're somewhere in the pipeline where there's a good level of certainty that this business will come. Sometimes even after accounts are open, the business doesn't show up. So I just want to be grounded in the expectation. But billion six pipeline in this environment is actually commendable And the reason is because we're focused on this more than, like I said, anything else. This is the most important thing. That's what people are getting paid to do this year.
spk12: Yeah, thank you. That's definitely very helpful. And then, Leslie, I think you mentioned a number of different scenarios you guys were looking at at the NIM. If, you know, hypothetically we see a rate hike, you know, this week and we stay in a higher for longer scenario for, you know, quite some time, call it, you know, a year or so, I think Tom mentioned some pretty attractive new loan yields you guys are putting on, but how do you see deposit rates kind of shifting in a prolonged rate pause environment?
spk04: So, you know, Christian, the guidance that I gave is predicated on a forward curve that at the time we printed the forecast, it feels like it changes every five minutes, had two rate hikes in it. Now we're looking more at one rate hike and then a pause. You know, and as I said to, I think, I do think from here, you know, deposit betas are going to accelerate a little bit. We're in the low 50s now. We'll probably get to, you know, a little bit higher than that, and that's what's kind of baked into that.
spk07: Thank you.
spk03: And one moment for our next question. And our last question will come from John Ofstrom of RBC Capital Markets. Your line is open.
spk09: Thanks. Good morning. Good morning, John. I appreciate you letting me in. I'm exhausted on the 1.6 billion deposit conversations. But a couple big picture ones. Raj, you talked about the tactical near-term exercise you went through. Yeah. Is that same exercise a priority right now? And what would be the near-term tactical priorities for you?
spk01: I think some of that stuff is still relevant and some less so. Honestly speaking, levels of liquidity and uninsured deposit to available liquidity, those things feel a lot less important today than they did 90 days ago. However, NIM stabilization, expense management, things of that nature, DDA growth, deposit growth, they are still very relevant. So I think we'll still keep an eye on liquidity metrics, for example, but probably move that down a little bit in terms of, is that what I'm looking at every day? I used to get a, when this crisis hit in March, I was getting two or three emails a day about wires that were going in and out of the bank. I don't get that report anymore, actually. I don't want to see that report again. It's irrelevant today. We've stepped it down from twice a day to once a day to once a week, and now it is at a place where we've gone back to normal, that I don't need to look at that information.
spk04: I get them more than he does.
spk01: One last thing to say, Mark, that I can then focus my time on looking at other things. So yeah, tactically, it still feels like that whiteboard that is still, a large part of that is still relevant and will stay relevant, but not all of it.
spk09: Okay, good. a bunch of different ways I could go, but just one more, I guess, that the shared national credit, the single relationship transactional pool, how big is that? And do you expect to bring that down over time? Or is this something that's basically going to churn over time?
spk06: It will come down over time. I think part of that was built up during the pandemic when there was an opportunity to put liquidity into play at floating rate, high quality you know, opportunities when the, you know, local middle market type business across most of our business units was not available or not accessible because of the health reasons and, you know, other issues. But that has never been, you know, a principal strategy of the organization. And so we will continue to be in, you know, credits that we are the lead or an important, you know, left lead with deposit business, but it will not be, you know, an important factor in our long-term growth, and we will exit, you know, opportunities where we think it's the right opportunity to get out and redistribute to better quality relationships in terms of the overall business that it brings to the bank, not necessarily the risk ratings of those underlying credits. Okay.
spk09: Have you disclosed how big that portfolio is in science?
spk04: No, we have not. I think we have in the past disclosed total shared national credits, but we have not disclosed the portion of that that we're referring to here because some of that business is relationship business. Yeah, right.
spk09: Fair enough.
spk04: I don't think we have. We'll have to dig into that a little more.
spk09: Okay, good. I'll let you go. Thank you very much. I appreciate it.
spk03: Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Raj Singh for closing remarks.
spk01: I'll end the call the same way I started it. It does feel very different from 90 years ago, and we're thankful to the market gods for that and happy to be focusing on what we've always focused on is building a long-term relationship-oriented bank. and appreciate you taking the time and engaging with us, and we'll see you or talk to you again in 90 days. Thank you. Bye.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect.
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