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spk28: Good morning, and thank you for joining us today for Bank United, Inc.' 's second quarter 2024 results conference call. On the call this morning are Raj Singh, Chairman, President, and CEO, Leslie Lunak, Chief Financial Officer, and Tom Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions including without 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 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, 2023, and any subsequent quarterly report on Form 10-Q or current report on Form 8-Q, 8-K, which are available at the SEC's website, www.sec.gov. With that, I'd like to now turn the call over to Mr. Raj Singh.
spk21: Thank you. Welcome everyone to our earnings call. Thank you for joining us. I'll start out by saying this really has been an outstanding quarter. You know, there's always some variability on how things will end when you're coming towards the end of the quarter, and sometimes things fall your way, sometimes they don't. This quarter, I think everything fell our way, whether you look at loans, deposits, NIDDA, whether you look at cost of deposits, margin, expenses, credit, capital, liquidity, I mean, I really couldn't have asked for a better end to the quarter. And just as we were celebrating, of course, India won the World Cup on the last day of the quarter. So like I said, I really couldn't have asked for more. I still haven't stopped celebrating. So thank you, Team India, for making my day. Let me quickly go into the numbers, and I'll highlight a few, and then Tom and Leslie will jump in with more details. Just to highlight, of course, EPS came in at 72 cents. I think I checked a couple of days ago. Consensus was around 65 cents. Margin, as we've been telling you for some time, that we expect margin to grow, which it did very nicely. I think last quarter we were at 257. We're up to 272 this quarter, so very happy about that. That margin grew simply because we are seeing success at transforming the balance sheet, both on the left and right side of the ledger here. So talking of the right side first, deposits, deposit costs actually came down for the first time. So last quarter we told you we're kind of getting to the place where deposit costs will not grow. Happy to report that actually we dropped deposit costs from 318 down to 309. you know, if you peel the onion back a little bit more, you know, a lot of that drop really came, not all of the drop came from DDA growth, which was phenomenal this quarter. But if you look at interest-bearing deposit costs, while they were up a little bit from 421 to 426, it's also beginning to plateau out. Last quarter, by the way, they were up 17 basis points. This quarter, up only five basis points. But overall, deposit costs were down from 318 to 309. We're very happy about that. Deposit growth, which is the big story here, non-broker deposits grew by 1.3 billion this quarter, and off that 1.3 billion, 826 million was non-interest DDA, which is just a very, very solid number. That's, by the way, on top of a pretty solid DDA growth that we had in the previous quarter as well. I think for the first half of the year, NIDDA is up 1.2 billion. So that transformation that I'm talking about to the right side of the balance sheet is well underway. But of course, the job is not done. We're going to keep at it and keep improving the deposit mix. We did take this opportunity to pay down more of the broker than we had originally planned. So net off pay down in broker, our deposit growth was $736 million. If you look at wholesale funding, if you define wholesale funding as brokered and FHLB combined, we brought that down by $1.2 billion this quarter. I had Leslie just yesterday look at this. Where was this wholesale funding a year ago or a year and a half ago, and when were we at this level or lower? You really have to go back to the beginning of this rate cycle, so early 2022. to see numbers as low as this. So despite the fact that we're still at 5.5% Fed funds rate, we've taken our wholesale funding down all the way back to when the Fed was at zero. So that's quite an achievement in a short period of time, basically in the last year. Asset mix also improved, just as we had been guiding to. While REZI declined by $212 million, our corporate business, commercial business, small business, CRE, everything grew. And if you combine all of that, the growth was $589 million in those categories. Resi, like I said, declined a little over $200 million. And the leasing business continued to run off as it has been for several quarters now. Overall, credit strength trends are still solid. Actually, this is the first quarter in some time where our criticized and classifieds declined just a little bit. But, you know, we've been proactive in risk rating credits down over the last few quarters. So this quarter, actually, the trend went the other way just a little bit. There was some migration in Office CRE. We actually had NPAs go up a little bit. The most notable are two loans in Office CRE, which amount to about $50 million, one in New York, one in Florida. But we're fully reserved for this, and none of this came as a surprise. We've been tracking this for quite some time. and feel pretty good about the results that we've already taken on these loans. In terms of, you know, Leslie will talk more to you about expenses, but even in fee income, I just wanted to point out that we've been making investments over the course of the last couple of years that have not been very noticeable, but they're beginning to now pop up. We're having good success with commercial cart. We're having good success with capital markets products. stuff that we've launched over the course of the last couple of years. And the numbers are beginning to be noticeable, and I'm very happy about that. And a big shout out to the teams who've worked on this over the last two years. Capital, liquidity are all robust. Tangible book value continues to grow. The mark on the bond portfolio continues to come down. So like I said, nothing but good news, and I'm very happy with how things turned out. In terms of guidance, not much in terms of, you know, we're not changing strategies mid-year. We've got to keep our heads down and keep delivering, DDA growth is still the most important thing for the success of the company. Let me take a minute to mention this billion two of growth that we've had in DDA. A large part of this has come from bringing in new customers. This doesn't happen without bringing in new clients and we've had a lot of success with broad-based, both New York, Florida, and our national businesses And when you look at pipelines, which Tom will talk about, we feel very optimistic about continuing that growth. It has also been helped by some seasonality, as we have talked to you in the past about. The first half of the year, seasonality helps us. The second half of the year, not so much. Towards the end of the year, it actually hurts us. I think similar trends will happen again. So I don't think you will see that billion dollars a quarter type of DDA growth for one reason only, which is seasonality. But other than that, in terms of the core growth, you should expect a similar level of new relationships coming on for at least the next six months that we can foresee based on our pipeline. What else, Leslie? Am I missing anything? Oh, yes, one very important topic. Also, while we're doing all this, we built this bank by attracting like-minded people who want to be part of a sort of organic growth story. And this whole bank has been built on bringing in people like that over the years. Our most recent add to our team that we announced a couple of months ago is Ernie Diaz, who's not in the room with me here. But Ernie came to us from TD Bank, where he was head of the consumer bank, ran the entire retail footprint, ran the wealth management business, the auto finance business. And before that, he's done just about every job at the bank. So we're very happy that someone of his caliber would join us. He's been with the bank, like I said, only a couple of months, but he's already bringing ideas to the table that we probably wouldn't have thought of if he wasn't with us. So a big welcome to Ernie, and I'm happy that the people are choosing to join Bank United. Let me turn this over to Tom, and he'll go over the numbers in a little more detail, and then we'll move to Leslie after that.
spk12: Great, Raj. Thank you. So, as Raj mentioned, total deposits were up 736 million for the quarter, including the reduction in brokered, non-brokered deposits grew total by 1.3 billion, NIDDA by 826 million, and NIDDA is up 11 percent quarter over quarter. As Raj alluded to, as we look forward, the pipelines, I think, remain, you know, very robust across all of the operating teams. New account business, I think, looks very good for the quarter. As he mentioned, the back book is always subject to seasonality and issues, but I think the new relationship pipeline continues to look very strong for not only the third quarter, but we track opportunities out 180 days kind of into the fourth quarter. We are taking some advantage of this and looking at reducing some rates on higher-price deposits. Some of these were relationships or deposits that we increased during the financial disruption of the previous year. And, you know, we think now is a good time as we are moving down cost of funds and continuing to increase deposits at the clip we're doing to take advantage of that and look at opportunities to reduce some very specific relationships and, you know, higher-rate-type deposits. On the loan side, overall loans were up $402 million quarter over quarter. Again, core C&I and CREE segments growing $589 million in total, $475 million for the C&I segments, $114 million for CREE. Mortgage warehouse was also up $83 million, and consistent with our strategy, residential was down $212 million, and the leasing in municipal finance subs were also down. I would say that when we look at the growth for the quarter, both on the CNI side and on the CREE side, you can see from the information that you can pick up in the supplemental data, it was pretty broad-based growth across, you know, segments. I would say seven or eight of our largest CNI segments all grew for the quarter. The ones where we have our practice teams, where we have our geographies, predominantly focused. We saw a nice broad base growth. If you look at Cree for the quarter, it grew within the asset segments, you know, that we're predominantly focused on now, which would be, you know, industrial multifamily and urban kind of core retail grocery anchor type business. And so you'll see the overall distribution of the Cree portfolio largely stayed almost exactly as it was for the previous quarter. except with some growth in everything with the exception of, obviously, office. We did not grow. But overall, very, very healthy quarter fours. Commercial pipeline looks very good going into Q3. We continue to expect high single growth in the core commercial portfolios for the year, consistent with prior guidance. More CNI than Cree. Resi, municipal, and equipment finance will continue to decline. The operating lease equipment portfolio declined by 62 million this quarter, and we took advantage of some opportunities to selectively sell some assets as we've been moving away from that business. I was looking at it yesterday. Over the last two years, we've declined our lease exposure from 702 million to 266 million over that period of time, and we're going to continue with that strategy. The loan-to-deposit ratio, improved from 89.6% to 88.7%. Let's dig a little bit deeper into CREE and talk about office as well. You can look at slides 12 through 15 in the supplemental deck where we've added some additional disclosure. So overall, big picture, you know, our CREE exposure remains, I think, relatively modest to 24%. of total loans, CRE to total risk-based capital is 165%. I think compared to others in our peer group in the 10 to $100 billion range, you know, their numbers were 35% and 222% respectively. So overall, you know, we've continued to keep the CRE portfolio kind of within the risk parameters that we've always focused on. And that 24% and 165 is kind of a number that we're comfortable with. At June 30th, the weighted average LTV or decree portfolio was 56%, and the weighted average DSCR was 1.77. 56% of the portfolio was in Florida, and 27% is in the New York tri-state area. Spent a little bit more time on office. As I told you on the last call, we track every single office loan. They're all right in front of me. Right now, when we break it down by sub-market and follow all the sub-markets, just in general, I would say if we look at this quarter over last quarter, we have Cree office loans in 16 different sub-markets that the company operates in. The credit statistics this quarter compared to last quarter were better in nine of the 16 sub-markets that we're in. and they were better in seven of the eight submarkets where we have exposure greater than $100 million. So it was a positive quarter as we look at tracking the credit metrics across the different business segments that we're in. And that was really primarily for one reason. Occupancy generally remained pretty strong across the portfolio, but what we really saw was abatement roll-off. And so, you know, a lot of the leasing activity, obviously, over the last couple of years has, you know, contained abatement periods of time. And during that abatement period of time, we don't, you know, we don't count that in the NOI. And we saw, you know, pretty broad improvement in debt service coverage ratios this quarter in the major segments that we're in, largely because of improving abatement situations. So specifically, We have $1.8 billion in office with 58% in Florida, which is predominantly suburban, 24% in the New York tri-state area. Of that, $309 million of the total CRE portfolio is medical office, which really has pretty different debt service coverage ratios and debt yield dynamics from an industry perspective. The construction portfolio also includes an additional $87 million in office-related exposure, $84 million of that is in Manhattan. Neither of those are ground-up construction. They're really renovation of existing buildings. The weighted average LTV of the stabilized office portfolio was 66%, and the weighted average debt service coverage ratio was 1.59 as of June 30th. There's also additional breakdown of those numbers by geography on slide 12. $402 million of the office loans mature in the next 12 months. $191 million of this This fixed rate rent rollover in the next 12 months is 9% of the office portfolio, so we have relatively light rent rollover in the next 12 months. With respect to the stabilized New York tri-state portfolio, 43% is in Manhattan. This is approximately $180 million and has a 96% occupancy and lease rollover in the next 12 months of 6%. We continue to see some encouraging signs in the Manhattan market. If you look at total leasing for the first half of the year, It was 15.5 million square feet, which was up about 9% over the previous year, predominantly in Class A space. And this is certainly not at the level prior to the pandemic, but we have seen a consistent improvement in the leasing activity in Manhattan over the last two years. This was the strongest quarter that we've seen increases over the last 12 months. Demand and demographics continues to be generally favorable in Florida. We are seeing a couple of weak spots in certain segments in the Orlando market, predominantly suburban North Orlando, where we have one of the loans Raj mentioned. There are some charts on slide 16 that give you a further geographic breakdown of the Florida and New York tri-state portfolio by sub-market. I would say that all other markets in Florida you know, are pretty strong. I was mentioning to Leslie this morning that I looked at the Tampa numbers for the quarter, and there's over 1.4 million square feet of lease space, and only 6 percent of that was sublease activity. So, you're generally seeing sublease activity go down, you know, fairly consistently in Florida. You're seeing more positive absorption in most of the markets, and virtually all the major submarkets in Florida for second quarter saw year-over-year rent increases. Modest, but year-over-year rent increases. We did have some CRE loans, as Raj mentioned, with the non-accrual this quarter for the first time. Non-performing CRE loans totaled $51 million as of June 30th. Total criticized and classified loans increased by $88 million during the quarter. This was all in the, predominantly in the office segment. Overall, the portfolio continues to perform comparatively well and is generally characterized by strong sponsors, long-term asset owners, low basis in the assets who continue to support the underlying properties. To date, concerns generally seem to be very asset-specific, renovating periods and delays and completing build-out of lease space, and in some cases, lower occupancy levels contributed to whatever risk migration we did have. And overall, we continue to believe the ultimate loss content from this portfolio will be very manageable for us. So with that, I'll turn it over to Leslie.
spk02: Thanks, Tom. Just a quick summary of the quarterly results. As Raj said, net income for the quarter was $53.7 million, or 72 cents per share. Net interest income was up $11.2 million this quarter, and the NIM increased 15 basis points to 272. The most significant contributor to this increase in margin was obviously an $888 million increase in average NIDDA. Average NIDDA grew to 27.5% of average total deposits and that's compared to 24.7% for the prior quarter. The yield on loans was up from 578 to 585 as new production came on at higher rates and the portfolio composition continues to shift into higher yielding assets. The yield on securities as expected was essentially flat quarter over quarter. We're very happy to see the average cost of total deposits decline to 309 for the second quarter compared to 318 last quarter, along with the slower pace of increase in the cost of interest bearing deposits. On a spot basis, the cost of interest bearing deposits is stable quarter over quarter. The average cost of FHLB advances did go up this quarter to 428 from 418, That's really just due to the expiration of a couple of cash flow hedges. From a guidance standpoint, we continue to expect the NIM to expand over the back half of 24, although I don't think we'll see 15 basis points per quarter. I would love that, but it's not what I'm expecting. But still continue to expect NIM to end the year in the high twos, and given that we're already at 272, I guess now you have a little better idea of what I mean by the high twos. Higher than that. So we do, and we expect net interest income to be up mid-single digits to low-high double digits year over year. Provision and reserve. The provision this quarter was $20 million, and the ACL, the loans ratio, continued to increase from 90 to 92 basis points. The commercial ACL ratio, which includes C&I, CRE, franchise and equipment finance, stood at 142 at June 30th. This quarter's provision and the increase in the ACL were driven by risk rating migration, an increase in some specific reserves, new loan production, changes in portfolio characteristics, partially offset by some improvements in the economic forecast. The reserve on Cree office was 247 at June 30th. That's up from 226 at March 31st. This build was prompted by some of the risk rating migration that you see and changes in commercial property market forecasts. You might recall that last quarter we put up a pretty large qualitative reserve on Cree office, over $20 million in anticipation of the fact that we were likely to see what we saw this quarter, some of that negative risk rating migration. And this quarter you saw some of that move from the qualitative reserve to the quantitative reserve and getting picked up in the quantitative calculation. We do expect the ACL to gradually build as a percentage of loans over the rest of 2024. likely getting closer to 1%, and some of that's going to be driven by the expected shift in portfolio composition. As Raj mentioned, criticized and classified assets declined by $52 million overall this quarter, with the $69 million increase in Cree being offset by a decline of $121 million in other commercial categories. A few comments on non-interest income and expense. Non-interest expense was pretty much flat quarter over quarter. Lease financing income was down about $5.8 million. That's due to two things, just the reduction in the size of the asset portfolio as well as fluctuation in residual income, which was a small loss this quarter compared to a small gain last quarter. Other non-interest income, we did have an increase in income this quarter from our customer derivatives business, our commercial card business, and syndication fees. Going forward, I'd expect an overall gradually increasing trend in that line item, but there are some things in here that can cause some quarterly volatility. I'll reiterate our mid-single-digit guidance for the year-over-year increase in non-interest expense, excluding the FDIC special assessments. This does include some rail car refurbishment costs that we're expecting in the back half of the year, and that's one of the things that's going to drive that increase. I'll make a brief comment on the year-over-year increase in compensation expense. Most of what you're seeing in the P&L is really driven by some fluctuations in liability classified share awards that are driven by changes in volatility in the company's stock price and some reversal of expense in the prior year for awards that didn't vest. Core salary expense is really only up about 2%. The ETR, I'd expect to be around 26 and a half going forward, excluding discrete items. Set one from a capital perspective, set one was stable at 11.6% this quarter compared to last quarter, and TCE to TA increased to 7.4%. That's all I have. I'm going to turn it over to Raj for closing comments, and then we'll take your questions.
spk21: I think, listen, like I said at the beginning of the call, couldn't be happier with the way the quarter turned out and looking forward, very optimistic when I look at the pipeline. So, All is well and happy, and we'll be glad to take questions. We'll turn it over to the operator for Q&A.
spk28: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Will Jones from KBW.
spk06: Hey, great. Good morning, guys.
spk17: Morning, Will. So, first of all, congrats on a nice quarter. I just wanted to start on the positives. I mean, it's impressive what you guys are doing on the non-interest bearing front. You know, growth was, you know, really nothing but spectacular this year. It sounds like there's continued optimism and that the pipelines still look good, but Maybe in the second half of the year, we might see a little bit of seasonality dampen that. Maybe the easier way to think about non-interest bearing for the year is maybe just a four-year growth rate. If you look at what you guys have already done, you're already approaching 20% growth for the year. Is there just a broader target for what you see non-interest bearing do this year in terms of just maybe a growth rate?
spk21: I think non-interest DDA, what we're shooting for is comfortable double-digit growth, but not 20%, 30% growth. When you take out seasonality, you take out the ups and downs of any given quarter, having mid-teens type of growth is very hard to deliver, by the way, especially in this environment. But if the environment stays as is and our pipelines stay as healthy as they are, you know, we should be able to get, you know, somewhere between 13%, 14%, 15%, 16% DDA growth. That's what, you know, would be a long-term projection. Now, the reality is that rates will not stay the same. Things will move around. And that can have a pretty big impact. I'll give you a very simple, just one example of one of our LOBs. which is the title business, when there is a mortgage refi boom, you will see that get supercharged. Right now, all the growth that is coming is really from getting market share. But the market itself, the wider market is very depressed because originations are at historic lows. When mortgage originations start to kick up, I don't know when that will be, a year from now or 10 years from now, who knows. But whatever they do, you will see those average account balances grow. And not much we'll have to do but accept to sit here and enjoy the growth. But putting aside what the interest rate gods will do, just the speed at which business is growing, I would say we're shooting for double digit in DDA growth. And I've said we want to get back to 30%. We're at 29. We were 27, I think, last quarter. So we're making progress towards getting back and capturing that hill, which is now within grasp. And then eventually getting back to our high water mark, which was, I think, 34%. So that'll be a good goal for sometime next year.
spk02: Yeah, just to recap, from here through the rest of the year, I would expect just modest growth, given the seasonal tail headwinds. Yeah.
spk10: Well, that's very helpful.
spk17: Well, great work on the non-DDA front. And Leslie, I appreciate that the margin guidance is still kind of unchanged in that high 2% range. But as we look at the loan side in particular, you can kind of see the remakes happening where core C&I and CRE is seeing strong growth. And we had that runoff and 1 to 4 family is still happening. As you grow that core C&I and your runoff you know, mortgage, what is kind of that trade-off in yield? I guess, in other words, what is the new loan yield you guys are receiving versus what's running off?
spk02: I mean, call it around 8%, 7.5% to 8% on most of the new production. And, you know, the resi portfolio yields in the mid-3s. So there you go.
spk17: And as, you know, you guys continue to target that high single-digit range for, you know, kind of core loans, Is it fair to assume that we will continue to kind of see maybe that 5 to 10 basis point increase in loan yields going forward? I mean, that seems reasonable, yes.
spk21: I just want to go back and make one more point about deposit growth. The deposit growth that you're seeing is really five years of effort in the making, and it's not something we did last quarter or even last year. This is many years of working on product and technology. and going to market, which is paying off today. It's not like we hired a bunch of guys last quarter and they brought this business in. We really did not do that. I talked about bringing Ernie in, but that was not... He didn't bring in any deposits yet. No, he's not locking on doors. That's not the hire. We could have gone that way. We did see a lot of producers over the last year. from all the usual names, but we did not choose to do that. This is more a long-term four or five-year strategy that is now coming into its own and is helping us. So just a point.
spk12: Well, I would also add on the loan yield side, if we look at the pipeline going forward and we kind of look sort of opportunity by opportunity between what's approved, what's accepted, term sheets, and things of that nature, I think that the pricing market remains fairly good. We're not seeing, you know, too much differential, you know, in terms of yields. Obviously, virtually all banks are trying to put more, you know, emphasis on growing the CNI business versus growing other parts of their book. But I think, you know, as we look at a good quality pipeline Q3 and into early Q4, you know, we're seeing a fair bit of firmness you know, in the yield on loans right now.
spk17: Yeah, okay. That's great. And job well done, guys. That's it for me.
spk28: Thank you. Thank you. One moment for our next question. Our next question comes from the line of Timur Brezilir from Wells Fargo. Hi, good morning.
spk08: Good morning. Good morning.
spk16: Maybe just following up on that line of questioning for DDA, Raj, you kind of alluded to the future opportunities within the title business. And I apologize if I missed this in the prepared remarks, but can you just kind of go through where the DDA growth has been coming from in the first half of the year and then maybe frame what the opportunity in the title business might look like if we do get some rate relief and increased mortgage activity?
spk21: Yeah, that's predicting what will happen when there is a refi boom. It's a little hard. It could be, you know, 20%, 30% lift in just average deposit balances, but I'm guessing at best. I will say that the growth that you saw this quarter was broad-based. Having said that, title business, was the biggest grower this quarter and also the biggest beneficiary of seasonality. But I would also like to point out the HOA business has also been growing very well. We organized that into a separate business line about three or four years ago and invested in technology over there also over the course of the last two years. So they're seeing the benefit of that. And we did some one or two added to the sales team a couple of times last year. Not a lot of people, but just a couple of people here and there. And all of that investment is paying off. So the HOA business also is far ahead of its budget for the year, just the way NTS, our national title business is. But we're seeing benefits in New York as well. And in New York, the story has been a little bit about the disruption in the marketplace that has given us an opening to pick up some core business. And in Florida, you know, it's a healthy market, so that also grew this quarter. Now, there are a couple of things which shrunk also this quarter, but those are seasonality trends in the other direction, but that's not DDA. That was municipal, which is largely a money market business, that grows in the fourth quarter but shrinks in the second and third quarter. So that went the other way. So there's a lot of moving parts, but overall I'll say it was broad-based growth. Yes, the title business was probably the biggest contributor and also the biggest beneficiary of the seasonality trends, but they'll also hurt the most in the fourth quarter when seasonality goes the other way.
spk12: I would add that we also saw a good increase in the corporate banking deposit business in the quarter, which is virtually all kind of transactional. and it was across all of the geographies that we're in. So, you know, it was a combination of both kind of specialty businesses and broad geography businesses.
spk16: Okay, great. And then just, again, a follow-up on the title business specifically. What are those balances today that are sitting in BDA? And then just to kind of frame the opportunity, maybe what was the balance of those accounts? What rates were lower? So we really don't disclose
spk02: We don't really disclose that kind of detail about deposit balances by line of business. In the aggregate, though, I think the title business is around $4 billion, and most of that's DDA, but I don't have those exact numbers in front of me, and we don't typically make that kind of public disclosure.
spk16: Understood. Okay. And then just one last one for me. Just looking at some of the degradation in the office portfolio over the the last couple of quarters and appreciate the comments on the qualitative reserve last quarter moving into qualitative this quarter. I guess, is it really just the lease abatements that's the biggest issue right now that you're seeing within the office book? And as you sit here today, assuming other commercial categories kind of stay stable, How should we think about the reserve on the office portfolio, maybe relative to what you're seeing for the trends in the last couple of quarters?
spk02: I'll comment on the reserve, and then I'll let Tom add a little bit of color around the book. Nothing we are seeing is outside of what we've been expecting to happen. We've been telling you for several quarters now that some of these loans are going to have issues. We didn't know which ones. Now we kind of know which ones. And this is exactly in line with our expectations for what was going to happen in the office book, and the reserve is at about 2.5%, and we feel like that's adequate.
spk12: Yeah, I would say that if you look at the overall performance of the office portfolio and the overall occupancy, debt service coverage, and debt yield numbers, it points to a portfolio that overall is doing well. Now, there will be a couple of spots within it, that there will be very asset-specific, you know, deals that, you know, have a challenge. I would say, predominantly, it's lease-up renovatement issues that impact DSCR, you know, early on, because during the abatement periods, the building is physically occupied, but it's not economically occupied because it's not contributing to NOI. There are You know, the one building Raj mentioned in New York is a building that's gone through renovation. We have two renovation buildings in New York, and those do have to go through a lease-up period and then an abatement period. So there are a couple of asset specifics that are in the portfolio, but overall, if you, you know, go through, you know, all 98 loans that I have in front of me, you know, the vast majority of them are performing very well.
spk18: Great. Thanks for that, Collin. Appreciate it.
spk28: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our next question comes from the line of David Bishop from Hovde Group. Good morning.
spk09: Good morning, Dave. Hey, Raj, Leslie, specifically, I know we spoke about this, but there's been a lot of, you know, I guess, agita, you know, angst about maybe the commercial CMBS market here, and I know you have some exposure there. Just curious how you're feeling about the, you know, that portfolio these days in relation to what's been out in the press there. Are you seeing any sort of, you know, risk of impairment? Just curious how that's holding up overall.
spk02: Yeah, so, you know, Yes, collateral losses have increased in the CMBS market, but we are seeing no risk of impairment whatsoever in our portfolio. All of our holdings are extremely well enhanced. We rigorously stress test each and every one of those securities on an at least quarterly basis. And we don't see any potential signs of impairment at all at this time because of the level of credit enhancement that we have. And we do monitor it on a deal-by-deal basis very rigorously.
spk09: And you guys avoid the single asset, single tenant investment?
spk02: Correct. Yes. Thank you for asking. We have no single asset, single borrower exposure.
spk09: Got it. And then, Leslie, I think I missed it. The operating expense guidance, how should we think about that in the back half of the year? It sounds like there could be some escalation in expenses.
spk02: Yeah, still mid-single-digit increase year-over-year in the aggregate, so no change to our guidance. And I just made the point that one of the things that's going to drive that is some rail car refurbishment that will happen. But no change in our overall guidance.
spk25: Great. Thank you.
spk28: Thank you. One moment for our next question. Our next question comes from the line of Steven Alexopoulos from J.P. Morgan.
spk15: Hey, good morning. It's Alex Lau on for Steve.
spk27: Good morning, Alex.
spk15: I have a question, a follow-up on the DDA and the title solutions business. In terms of the seasonality for that business, is last year's seasonal trends a good period to model after, or has anything changed in that business that would result in last year in not being a good data point to refer to?
spk20: I think you could use that.
spk21: Probably the best year that you could probably peel that would be last year. Yeah. And, yeah, I would say that, yeah, last year is probably as typical a year.
spk02: Yeah, barring, as Raj said earlier, something happening in the rate markets that But all else held equal, that makes sense.
spk15: Got it. And how much of the growth in the title solutions business this year has been from gaining market share versus some seasonality?
spk21: I will say, I'll give you, that business is growing at mid-teens level if you take out the seasonality. In terms of new relationships that we're adding on, And in terms of balances, even down for seasonality, it's about mid-teen growth rate. We're bringing in about 40 to 45 clients per quarter.
spk12: And that would equate to about a 15% to 18% increase in the overall client base.
spk15: Great color. Thank you. And then my last one. How big is your deposit pipeline for treasury management at quarter end, and how is that compared to the prior quarter?
spk21: It's very similar. It really hasn't, you know, from beginning of this year to now, as we're bringing in, as closing in the pipeline, new things go into the pipeline, so it really hasn't changed that much.
spk02: That pipeline has actually been pretty consistent for some time. It tends to get replenished at a pretty constant rate.
spk05: Thanks for answering my questions.
spk28: Thank you. One moment for our next question. Our next question comes from the line of Ben Gerlinger from Citi.
spk04: Hey, good morning.
spk28: Hey, Ben.
spk13: I apologize up front. There's a lot of calls going on this morning, so I'm you guys have a pretty good quarter so i agree the transcript while you're talking but um is there have you guys given any indication of kind of overall capital deployment whether it be share or purchase or potential down the road for continued outsized loan growth i'm just trying to get a sense of how you guys are thinking about capital given that your share prices still fairly compressed. It's had a good rebound here, but also you also had a good quarter for growth, and the Southeast in general just seems to have a better economic backdrop.
spk21: Yeah, Leslie and I were working on the board agenda for August actually just yesterday, and I told her to add a section on capital discussion. So listen, we're looking at a pretty happy set of facts here. We're seeing some growth opportunity We're seeing capital build up, and my first choice always is to actually deploy the capital and grow it profitably. If we're not able to see that for a sustained period of time, then we think about buybacks. And then, of course, in the back of our mind is always the environment, if it is conducive to buybacks or not. And also, you've heard us in the past that we are very sensitive to all our stakeholders, especially the rating agencies. who are quite sensitive about capital returns. So we're going to keep all that in mind. We'll have a discussion in August. And I don't want to get ahead of myself and say something that, you know, I'm not authorized yet by the board, but we'll have a discussion like we've had in the past. But right now we're out on the sidelines. Maybe in August we'll do something or maybe later in the year. But right now, you know, I'm looking at a decent pipeline, and if we can actually deploy this capital, that would be the best outcome.
spk04: Gotcha.
spk21: This year we've given guidance that balance sheet will not grow from beginning to the end of the year, and I think give or take we'll probably end up at that level, but I want to grow eventually. Not growing is no fun. So, you know, Leslie will kill me if I start talking about next year, so I won't. But I want to get back in the growth business.
spk11: Gotcha. Are you able to say what day the board meeting is so I know what day it is?
spk29: Nope.
spk14: Nope.
spk29: If anything happens, there will be a press release.
spk14: Yeah, but I think that sounds good. I just tried to get in front of it by about four minutes. All right. Well, I appreciate it. Thank you. Thank you.
spk28: Thank you. At this time, I would now like to turn the conference back over to Raj Singh for closing remarks.
spk21: Like I said, India winning the World Cup was the big cherry on a pretty decent Sunday. We're very happy with the way the quarter turned out. We're very optimistic as we look to the future. Thank you for your time this morning. Call us if you have any more detailed questions. Otherwise, we'll see you or talk to you again in three months. Bye.
spk28: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Good morning, and thank you for joining us today for BankUnited, Inc.' 's second quarter 2024 results conference call. On the call this morning are Raj Singh, Chairman, President, and CEO, Leslie Lunak, Chief Financial Officer, and Tom Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions including without 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 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 31, 2023, and any subsequent quarterly report on Form 10-Q or current report on Form 8-Q, 8-K, which are available at the SEC's website, www.sec.gov. With that, I'd like to now turn the call over to Mr. Raj Singh.
spk21: Thank you. Welcome, everyone, to our earnings call. Thank you for joining us. I'll start out by saying this really has been an outstanding quarter. You know, there's always some variability on how things will end when you're coming towards the end of the quarter, and sometimes things fall your way, sometimes they don't. This quarter, I think everything fell our way, whether you look at loans, deposits, NIDDA, whether you look at cost of deposits, margin, expenses, credit, capital, liquidity, I mean, I really couldn't have asked for a better end to the quarter. And just as we were celebrating, of course, India won the World Cup on the last day of the quarter. So like I said, I really couldn't have asked for more. I still haven't stopped celebrating. So thank you, Team India, for making my day. Let me quickly go into the numbers, and I'll highlight a few, and then Tom and Leslie will jump in with more details. Just to highlight, of course, EPS came in at $0.72. I think I checked a couple of days ago. Consensus was around $0.65. Margin, as we've been telling you for some time, that we expect margin to grow, which it did very nicely. I think last quarter we were at $2.57. We're up to $2.72 this quarter, so very happy about that. That margin grew simply because we are seeing success at transforming the balance sheet, both on the left and right side of the ledger here. So talking of the right side first, deposits, deposit costs actually came down for the first time. So last quarter we told you we're kind of getting to the place where deposit costs will not grow. Happy to report that actually we dropped deposit costs from 318 down to 309. you know, if you peel the onion back a little bit more, you know, a lot of that drop really came, not all of the drop came from DDA growth, which was phenomenal this quarter. But if you look at interest-bearing deposit costs, while they were up a little bit from 421 to 426, it's also beginning to plateau out. Last quarter, by the way, they were up 17 basis points, and this quarter up only five basis points. But overall deposit costs were down from 318 to 309. We're very happy about that. Deposit growth, which is the big story here, non-broker deposits grew by 1.3 billion this quarter, and off that 1.3 billion, 826 million was non-interest DDA, which is just a very, very solid number. That's, by the way, on top of a pretty solid DDA growth that we had in the previous quarter as well. I think for the first half of the year, NIDDA is up 1.2 billion. So that transformation that I'm talking about to the right side of the balance sheet is well underway. But of course, the job is not done. We're going to keep at it and keep improving the deposit mix. We did take this opportunity to pay down more of the broker than we had originally planned. So net off pay down in broker, our deposit growth was $736 million. If you look at wholesale funding, if you define wholesale funding as brokered and FHLB combined, we brought that down by $1.2 billion this quarter. I had Leslie just yesterday look at this. Where was this wholesale funding a year ago or a year and a half ago, and when were we at this level or lower? You really have to go back to the beginning of this rate cycle, so early 2022. to see numbers as low as this. So despite the fact that we're still at 5.5% Fed funds rate, we've taken our wholesale funding down all the way back to when the Fed was at zero. So that's quite an achievement in a short period of time, basically in the last year. Asset mix also improved, just as we had been guiding to. While REZI declined by $212 million, our corporate business, commercial business, small business, CRE, everything grew. And if you combine all of that, the growth was $589 million in those categories. Resi, like I said, declined a little over $200 million. And the leasing business continued to run off as it has been for several quarters now. Overall, credit strength trends are still solid. Actually, this is the first quarter in some time where our criticized and classifieds declined just a little bit. But, you know, we've been proactive in risk rating credits down over the last few quarters. So this quarter, actually, the trend went the other way just a little bit. There was some migration in Office CRE. We actually had NPAs go up a little bit. The most notable are two loans in Office CRE, which amount to about $50 million, one in New York, one in Florida. But we're fully reserved for this, and none of this came as a surprise. We've been tracking this for quite some time. and feel pretty good about the results that we've already taken on these loans. In terms of, you know, Leslie will talk more to you about expenses, but even in fee income, I just wanted to point out that we've been making investments over the course of the last couple of years that have not been very noticeable, but they're beginning to now pop up. We're having good success with commercial card. We're having good success with capital markets products. stuff that we've launched over the course of the last couple of years. And the numbers are beginning to be noticeable, and I'm very happy about that. And a big shout out to the teams who've worked on this over the last two years. Capital, liquidity are all robust. Tangible book value continues to grow. The mark on the bond portfolio continues to come down. So like I said, nothing but good news, and I'm very happy with how things turned out. In terms of guidance, not much in terms of, you know, we're not changing strategies mid-year. We've got to keep our heads down and keep delivering. DDA growth is still the most important thing for the success of the company. Let me take a minute to mention this billion two of growth that we've had in DDA. A large part of this has come from bringing in new customers. This doesn't happen without bringing in new clients and we've had a lot of success. We've broad-based both New York, Florida and our national businesses And when you look at pipelines, which Tom will talk about, we feel very optimistic about continuing that growth. It has also been helped by some seasonality, as we have talked to you in the past about. The first half of the year, seasonality helps us. The second half of the year, not so much. Towards the end of the year, it actually hurts us. I think similar trends will happen again. So I don't think you will see that, you know, a billion dollars a quarter type of DDA growth for one reason only, which is seasonality. But other than that, in terms of the core growth, you should expect similar level of new relationships coming on for at least the next six months that we can foresee based on our pipeline. What else, Leslie? Am I missing anything? Oh, yes, one very important topic. Also, while we're doing all this, we built this bank by attracting like-minded people who want to be part of a sort of organic growth story. And this whole bank has been built on bringing in people like that over the years. Our most recent add to our team that we announced a couple of months ago is Ernie Diaz, who's not in the room with me here. But Ernie came to us from TD Bank, where he was head of the consumer bank, ran the entire retail footprint, ran the wealth management business, the auto finance business. And before that, he's done just about every job at the bank. So we're very happy that someone of his caliber would join us. He's been with the bank, like I said, only a couple of months, but he's already bringing ideas to the table that we probably wouldn't have thought of if he wasn't with us. So a big welcome to Ernie, and I'm happy that the people are choosing to join Bank United. Let me turn this over to Tom, and he'll go over the numbers in a little more detail, and then we'll move to Leslie after that.
spk12: Great, Raj. Thank you. So, as Raj mentioned, total deposits were up 736 million for the quarter, including the reduction in brokered, non-brokered deposits grew total by 1.3 billion, NIDDA by 826 million, and NIDDA is up 11 percent quarter over quarter. As Raj alluded to, as we look forward, the pipelines, I think, remain, you know, very robust across all of the operating teams. New account business, I think, looks very good for the quarter. As he mentioned, the back book is always subject to seasonality and issues, but I think the new relationship pipeline continues to look very strong for not only the third quarter, but we track opportunities out 180 days kind of into the fourth quarter. We are taking some advantage of this and looking at reducing some rates on higher price deposits. Some of these were relationships or deposits that we increased during the financial disruption of the previous year. And, you know, we think now is a good time as we are moving down cost of funds and continuing to increase deposits at the clip we're doing to take advantage of that and look at opportunities to reduce some very specific relationships and, you know, higher rate type deposits. On the loan side, overall loans were up $402 million quarter-over-quarter. Again, core C&I and CREE segments growing $589 million in total, $475 million for the C&I segments, $114 million for CREE. Mortgage warehouse was also up $83 million, and consistent with our strategy, residential was down $212 million, and the leasing in municipal finance subs were also down. I would say that when we look at the growth for the quarter, both on the CNI side and on the CREE side, you can see from the information that you can pick up in the supplemental data, it was pretty broad-based growth across, you know, segments. I would say seven or eight of our largest CNI segments all grew for the quarter. The ones where we have our practice teams, where we have our geographies, predominantly focused. We saw a nice broad base growth. If you look at Cree for the quarter, it grew within the asset segments, you know, that we're predominantly focused on now, which would be, you know, industrial multifamily and urban kind of core retail grocery anchor type business. And so you'll see the overall distribution of the Cree portfolio largely stayed almost exactly as it was for the previous quarter. except with some growth in everything with the exception of, obviously, office. We did not grow. But overall, very, very healthy quarter fours. Commercial pipeline looks very good going into Q3. We continue to expect high single growth in the core commercial portfolios for the year, consistent with prior guidance. More CNI than CRE. Resi, municipal, and equipment finance will continue to decline. The operating lease equipment portfolio declined by 62 million this quarter, and we took advantage of some opportunities to selectively sell some assets as we've been moving away from that business. I was looking at it yesterday. Over the last two years, we've declined our lease exposure from 702 million to 266 million over that period of time, and we're going to continue with that strategy. The loan-to-deposit ratio, improved from 89.6% to 88.7%. Let's dig a little bit deeper into CREE and talk about office as well. You can look at slides 12 through 15 in the supplemental deck where we've added some additional disclosure. So overall, big picture, you know, our CREE exposure remains, I think, relatively modest to 24%. of total loans, CRE to total risk-based capital is 165%. I think compared to others in our peer group in the 10 to $100 billion range, you know, their numbers were 35% and 222% respectively. So overall, you know, we've continued to keep the CRE portfolio kind of within the risk parameters that we've always focused on. And that 24% and 165 is kind of a number that we're comfortable with. At June 30th, the weighted average LTV or decree portfolio was 56%, and the weighted average DSCR was 1.77. 56% of the portfolio is in Florida, and 27% is in the New York tri-state area. Spent a little bit more time on office. As I told you on the last call, we track every single office loan. They're all right in front of me. Right now, when we break it down by sub-market and follow all the sub-markets, just in general, I would say if we look at this quarter over last quarter, we have Cree office loans in 16 different sub-markets that the company operates in. The credit statistics this quarter compared to last quarter were better in nine of the 16 sub-markets that we're in. and they were better in seven of the eight submarkets where we have exposure greater than $100 million. So it was a positive quarter as we look at tracking the credit metrics across the different business segments that we're in. And that was really primarily for one reason. Occupancy generally remained pretty strong across the portfolio, but what we really saw was abatement roll-off. And so, you know, a lot of the leasing activity, obviously, over the last couple of years has, you know, contained abatement periods of time. And during that abatement period of time, we don't, you know, we don't count that in the NOI. And we saw, you know, pretty broad improvement in debt service coverage ratios this quarter in the major segments that we're in, largely because of improving abatement situations. So specifically, We have $1.8 billion in office with 58% in Florida, which is predominantly suburban, 24% in the New York tri-state area. Of that $309 million of the total CREE portfolio is medical office, which really has pretty different debt service coverage ratios and debt yield dynamics from an industry perspective. The construction portfolio also includes an additional $87 million in office-related exposure, $84 million of that is in Manhattan. Neither of those are ground-up construction. They're really renovation, you know, of existing buildings. The weighted average LTV of the stabilized office portfolio was 66%, and the weighted average debt service coverage ratio was 1.59 as of June 30th. There's also additional breakdown of those numbers by geography on slide 12. $402 million of the office loans mature in the next 12 months. $191 million of this This fixed rate rent rollover in the next 12 months is 9% of the office portfolio, so we have relatively light rent rollover in the next 12 months. With respect to the stabilized New York tri-state portfolio, 43% is in Manhattan. This is approximately $180 million and has a 96% occupancy and lease rollover in the next 12 months of 6%. We continue to see some encouraging signs in the Manhattan market. If you look at total leasing for the first half of the year, It was 15.5 million square feet, which was up about 9% over the previous year, predominantly in Class A space. And, you know, this is certainly not at the level prior to the pandemic, but we have seen a consistent improvement in the leasing activity in Manhattan over the last two years. This was the strongest quarter that we've seen increases over the last 12 months. Demand and demographics continues to be generally favorable in Florida. We are seeing a couple of weak spots in certain segments in the Orlando market, predominantly suburban North Orlando, where we have one of the loans Raj mentioned. There are some charts on slide 16 that give you a further geographic breakdown of the Florida and New York tri-state portfolio by sub-market. I would say that all other markets in Florida you know, are pretty strong. I was mentioning to Leslie this morning that I looked at the Tampa numbers for the quarter, and there's over 1.4 million square feet of lease space, and only 6 percent of that was sublease activity. So, you're generally seeing sublease activity go down, you know, fairly consistently in Florida. You're seeing more positive absorption in most of the markets, and virtually all the major submarkets in Florida for second quarter saw year-over-year rent increases. Modest, but year-over-year rent increases. We did have some CRE loans, as Raj mentioned, with the non-recrual this quarter for the first time. Non-performing CRE loans totaled $51 million as of June 30th. Total criticized and classified loans increased by $88 million during the quarter. This was all in the, predominantly in the office segment. Overall, the portfolio continues to perform comparatively well and is generally characterized by strong sponsors, long-term asset owners, low basis in the assets who continue to support the underlying properties. To date, concerns generally seem to be very asset-specific, renovating periods and delays and completing build-out of lease space, and in some cases, lower occupancy levels contributed to whatever risk migration we did have. And overall, we continue to believe the ultimate loss content from this portfolio will be very manageable for us. So with that, I'll turn it over to Leslie.
spk02: Thanks, Tom. Just a quick summary of the quarterly results. As Raj said, net income for the quarter was $53.7 million, or 72 cents per share. Net interest income was up $11.2 million this quarter, and the NIM increased 15 basis points to 272. The most significant contributor to this increase in margin was obviously an $888 million increase in average NIDDA. Average NIDDA grew to 27.5% of average total deposits, and that's compared to 24.7% for the prior quarter. The yield on loans was up from 578 to 585 as new production came on at higher rates and the portfolio composition continues to shift into higher yielding assets. The yield on securities, as expected, was essentially flat quarter over quarter. We're very happy to see the average cost of total deposits decline to 309 for the second quarter compared to 318 last quarter, along with the slower pace of increase in the cost of interest-bearing deposits. On a spot basis, the cost of interest-bearing deposits is stable quarter over quarter. The average cost of FHLB advances did go up this quarter to 428 from 418, That's really just due to the expiration of a couple of cash flow hedges. From a guidance standpoint, we continue to expect the NIM to expand over the back half of 24, although I don't think we'll see 15 basis points per quarter. I would love that, but it's not what I'm expecting. But still continue to expect NIM to end the year in the high twos, and given that we're already at 272, I guess now you have a little better idea of what I mean by the high twos. Higher than that. So we do, and we expect net interest income to be up mid-single digits to low-high double digits year over year. Provision and reserve. The provision this quarter was $20 million, and the ACL, the loans ratio, continued to increase from 90 to 92 basis points. The commercial ACL ratio, which includes C&I, CRE, franchise and equipment finance, stood at 142 at June 30th. This quarter's provision and the increase in the ACL were driven by risk rating migration, an increase in some specific reserves, new loan production, changes in portfolio characteristics, partially offset by some improvements in the economic forecast. The reserve on Cree office was 247 at June 30th. That's up from 226 at March 31st. This build was prompted by some of the risk rating migration that you see and changes in commercial property market forecasts. You might recall that last quarter we put up a pretty large qualitative reserve on Cree office, over $20 million in anticipation of the fact that we were likely to see what we saw this quarter, some of that negative risk rating migration. And this quarter you saw some of that move from the qualitative reserve to the quantitative reserve and getting picked up in the quantitative calculation. We do expect the ACL to gradually build as a percentage of loans over the rest of 2024. likely getting closer to 1%, and some of that's going to be driven by the expected shift in portfolio composition. As Raj mentioned, criticized and classified assets declined by $52 million overall this quarter, with the $69 million increase in CRE being offset by a decline of $121 million in other commercial categories. A few comments on non-interest income and expense. Non-interest expense was pretty much flat quarter over quarter. Lease financing income was down about $5.8 million. That's due to two things, just the reduction in the size of the asset portfolio as well as fluctuation in residual income, which was a small loss this quarter compared to a small gain last quarter. Other non-interest income, we did have an increase in income this quarter from our customer derivatives business, our commercial card business, and syndication fees. Going forward, I'd expect an overall gradually increasing trend in that line item, but there are some things in here that can cause some quarterly volatility. I'll reiterate our mid-single digit guidance for the year-over-year increase in non-interest expense, excluding the FDIC special assessments. This does include some rail car refurbishment costs that we're expecting in the back half of the year, and that's one of the things that's going to drive that increase. I'll make a brief comment on the year-over-year increase in compensation expense. Most of what you're seeing in the P&L is really driven by Some fluctuations in liability classified share awards that are driven by changes in volatility in the company's stock price and some reversal of expense in the prior year for awards that didn't vest. Core salary expense is really only up about 2%. The ETR, I'd expect to be around 26.5% going forward, excluding discrete items. Set one from a capital perspective, set one was stable at 11.6% this quarter compared to last quarter, and TCE to TEA increased to 7.4%. That's all I have. I'm going to turn it over to Raj for closing comments, and then we'll take your questions.
spk21: I think, listen, like I said at the beginning of the call, couldn't be happier with the way the quarter turned out and looking forward, very optimistic when I look at the pipeline. So, All is well and happy, and we'll be glad to take questions. We'll turn it over to the operator for Q&A.
spk28: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Will Jones from KBW.
spk06: Hey, great. Good morning, guys.
spk17: Morning, Will. So, first of all, congrats on a nice quarter. I just wanted to start on the positives. I mean, it's impressive what you guys are doing on the non-interest bearing front. You know, growth was, you know, really nothing but spectacular this year. It sounds like there's continued optimism and that the pipelines still look good, but You know, maybe in the second half of the year we might see a little bit of seasonality kind of dampen that. And maybe the easier way to think about non-interest bearing for the year is maybe just a four-year growth rate. And, you know, if you look at what you guys have already done, you're already, you know, approaching, you know, 20% growth for the year. Is there just a broader target for what you see non-interest bearing do this year in terms of just maybe a growth rate?
spk21: I think non-interest DDA, what we're shooting for is comfortable double-digit growth, but not 20%, 30% growth. When you take out seasonality, you take out the ups and downs of any given quarter, having mid-teens type of growth is very hard to deliver, by the way, especially in this environment. But if the environment stays as is and our pipelines stay as healthy as they are, you know, we should be able to get, you know, somewhere between 13%, 14%, 15%, 16% DDA growth. That's what, you know, would be a long-term projection. Now, the reality is that rates will not stay the same. Things will move around. And that can have a pretty big impact. I'll give you a very simple, just one example of one of our LOBs. which is the title business, when there is a mortgage refi boom, you will see that get supercharged. Right now, all the growth that is coming is really from getting market share. But the market itself, the wider market is very depressed because originations are at historic lows. When mortgage originations start to kick up, I don't know when that will be, a year from now or 10 years from now, who knows. But whatever they do, you will see those average account balances grow. And not much we'll have to do but accept to sit here and enjoy the growth. But putting aside what the interest rate gods will do, just the speed at which business is growing, I would say we're shooting for double-digit in DDA growth. And I've said we want to get back to 30%. We're at 29. We were 27, I think, last quarter. So we're making progress towards getting back and capturing that hill, which is now within grasp, and then eventually getting back to our high water mark, which was, I think, 34%. So that'll be a good goal for sometime next year.
spk02: Yeah, just to recap, from here through the rest of the year, I would expect just modest growth, given the seasonal tail headwinds. Yeah.
spk17: Well, that's very helpful. Great work on the non-DDA front. And Leslie, I appreciate that the margin guidance is still kind of unchanged in that high 2% range. But as we look at the loan side in particular, you can kind of see the remakes happening where Core C&I and CRE is seeing strong growth. And we have that runoff. And then 1 to 4 family is still happening. As you grow that Core C&I and your runoff you know, mortgage, what is kind of that trade-off in yield? I guess, in other words, what is the new loan yield you guys are receiving versus what's running off?
spk02: I mean, call it around 8%, 7.5% to 8% on most of the new production. And, you know, the resi portfolio yields in the mid-3s. So there you go.
spk17: And as, you know, you guys continue to target that high single-digit range for, you know, kind of the core loans, Is it fair to assume that we will continue to kind of see maybe that 5 to 10 basis point increase in loan yields going forward? I mean, that seems reasonable, yes.
spk21: I just want to go back and make one more point about deposit growth. The deposit growth that you're seeing is really five years of effort in the making, and it's not something we did last quarter or even last year. This is many years of working on product and technology. and going to market, which is paying off today. It's not like we hired a bunch of guys last quarter and they brought this business in. We really did not do that. I talked about bringing Ernie in, but that was not... He didn't bring in any deposits yet. No, he's not locking on doors. That's not the hire. We could have gone that way. We did see a lot of producers over the last year. From you know, all the usual names, but we did not choose to do that This is more a long-term four or five year strategy that is now coming into its its own and And is helping us so just just just a point.
spk12: Well, I would also add on the loan yield side if we look at the pipeline going forward and we kind of look sort of opportunity by opportunity between you know, what's approved what's accepted term sheets and and things of that nature, I think that the pricing market remains fairly good. We're not seeing, you know, too much differential, you know, in terms of yields. Obviously, virtually all banks are trying to put more, you know, emphasis on growing the CNI business versus growing other parts of their book. But I think, you know, as we look at a good quality pipeline Q3 into early Q4, you know, we're seeing a fair bit of firmness you know, in the yield on loans right now.
spk17: Yeah, okay. That's great. And job well done, guys. That's it for me.
spk28: Thank you. Thank you. One moment for our next question. Our next question comes from the line of Timur Brezilir from Wells Fargo. Hi, good morning.
spk08: Good morning. Good morning.
spk16: Maybe just following up on that line of questioning for DDA, Raj, you kind of alluded to the future opportunities within the title business. And I apologize if I missed this in the prepared remarks, but can you just kind of go through where the DDA growth has been coming from in the first half of the year and then maybe frame what the opportunity in the title business might look like if we do get some rate relief and increased mortgage activity?
spk21: Yeah, that's predicting what will happen when there is a refi boom. It's a little hard. It could be, you know, a 20%, 30% lift in just average deposit balances, but I'm guessing at best. I will say that the growth that you saw this quarter was broad-based. Having said that, title business, was the biggest grower this quarter and also the biggest beneficiary of seasonality. But I would also like to point out the HOA business has also been growing very well. We organized that into a separate business line about three or four years ago and invested in technology over there also over the course of the last two years. So they're seeing the benefit of that. And we did some one or two added to the sales team a couple of times last year. Not a lot of people, but just a couple of people here and there. And all of that investment is paying off. So the HOA business also is far ahead of its budget for the year, just the way NTS, our national title business is. But we're seeing benefits in New York as well. And in New York, the story has been a little bit about the disruption in the marketplace that has given us an opening to pick up some core business. And in Florida, it's a healthy market, so that also grew this quarter. Now, there are a couple of things which shrunk also this quarter, but those are seasonality trends in the other direction, but that's not DDA. That was municipal, which is largely a money market business, that grows in the fourth quarter but shrinks in the second and third quarter. So that went the other way. So there's a lot of moving parts, but overall I would say it was broad-based growth. Yes, the title business was probably the biggest contributor and also the biggest beneficiary of the seasonality trends, but they'll also hurt the most in the fourth quarter when seasonality goes the other way.
spk12: I would add that we also saw a good increase in the corporate banking deposit business in the quarter, which is virtually all kind of transactional. and it was across all of the geographies that we're in. So, you know, it was a combination of both kind of specialty businesses and broad geography businesses.
spk16: Okay, great. And then just, again, a follow-up on the title business specifically. What are those balances today that are sitting in BDA? And then just to kind of frame the opportunity, maybe what was the balance of those accounts? What rates were lower? So we really don't disclose
spk02: We don't really disclose that kind of detail about deposit balances by line of business. In the aggregate, though, I think the title business is around $4 billion, and most of that's DDA, but I don't have those exact numbers in front of me, and we don't typically make that kind of public disclosure.
spk16: Understood. Okay. And then just one last one for me. Just looking at some of the degradation in the office portfolio over the the last couple of quarters and appreciate the comments on the qualitative reserve last quarter moving into qualitative this quarter. I guess, is it really just the lease abatements that's the biggest issue right now that you're seeing within the office book? And as you sit here today, assuming other commercial categories kind of stay stable, How should we think about the reserve on the office portfolio, maybe relative to what you're seeing for the trends in the last couple of quarters?
spk02: I'll comment on the reserve, and then I'll let Tom add a little bit of color around the book. Nothing we are seeing is outside of what we've been expecting to happen. We've been telling you for several quarters now that some of these loans are going to have issues. We didn't know which ones. Now we kind of know which ones. And this is exactly in line with our expectations for what was going to happen in the office book, and the reserve is at about 2.5%, and we feel like that's adequate.
spk12: Yeah, I would say that if you look at the overall performance of the office portfolio and the overall occupancy, debt service coverage, and debt yield numbers, it points to a portfolio that overall is doing well. Now, there will be a couple of spots within it, that there will be very asset-specific, you know, deals that, you know, have a challenge. I would say predominantly it's lease-up renovatement issues that impact DSCR, you know, early on because during the abatement periods, the building is physically occupied, but it's not economically occupied because it's not contributing to NOI. There are You know, the one building Raj mentioned in New York is a building that's gone through renovation. We have two renovation buildings in New York, and those do have to go through a lease-up period and then an abatement period. So there are a couple of asset specifics that are in the portfolio, but overall if you, you know, go through, you know, all 98 loans that I have in front of me, you know, the vast majority of them are performing very well. Great.
spk18: Thanks for that, Collin. Appreciate it.
spk28: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our next question comes from the line of David Bishop from Hovde Group.
spk08: Good morning.
spk09: Good morning, Dave. Hey, Raj, Leslie, specifically, I know we spoke about this, but there's been a lot of, you know, I guess, agita, you know, angst about maybe the commercial CMBS market here, and I know you have some exposure there. Just curious how you're feeling about the, you know, that portfolio these days in relation to what's been out in the press there. Are you seeing any sort of, you know, risk of impairment? Just curious how that's holding up overall.
spk02: Yeah, so, you know, Yes, collateral losses have increased in the CMBS market, but we are seeing no risk of impairment whatsoever in our portfolio. All of our holdings are extremely well enhanced. We rigorously stress test each and every one of those securities on an at least quarterly basis. And we don't see any potential signs of impairment at all at this time because of the level of credit enhancement that we have. And we do monitor it on a deal-by-deal basis very rigorously.
spk09: And you guys avoid the single asset, single tenant investment?
spk02: Correct. Yes. Thank you for asking. We have no single asset, single borrower exposure.
spk09: Got it. And then, Leslie, I think I missed it. The operating expense guidance, how should we think about that in the back half of the year? It sounds like there could be some escalation in expenses.
spk02: Yeah, still mid-single-digit increase year-over-year in the aggregate, so no change to our guidance. And I just made the point that one of the things that's going to drive that is some rail car refurbishment that will happen. But no change in our overall guidance.
spk25: Great. Thank you.
spk28: Thank you. One moment for our next question. Our next question comes from the line of Steven Alex Sopaulos from J.P. Morgan.
spk15: Hey, good morning. It's Alex Lao on for Steve.
spk27: Good morning, Alex.
spk15: I have a question, a follow-up on the DDA and the title solutions business. In terms of the seasonality for that business, is last year's seasonal trends a good period to model after, or has anything changed in that business that would result in last year in not being a good data point to refer to?
spk20: I think you could use that.
spk21: Probably the best year that you could probably peel that would be last year. Yeah. And, yeah, I would say that, yeah, last year is probably as typical a year.
spk02: Yeah, barring, as Raj said earlier, something happening in the rate markets that But all else held equal, that makes sense.
spk15: Got it. And how much of the growth in the title solutions business this year has been from gaining market share versus some seasonality?
spk21: I will say, I'll give you, that business is growing at mid-teens level if you take out the seasonality. In terms of new relationships that we're adding on, And in terms of balances, evened out for seasonality, it's about mid-teen growth rate. We're bringing in about 40 to 45 clients per quarter.
spk12: And that would equate to about a 15% to 18% increase in the overall client base.
spk15: Great color. Thank you. And then my last one. How big is your deposit pipeline for treasury management at quarter end, and how is that compared to the prior quarter?
spk21: It's very similar. It really hasn't, you know, from beginning of this year to now, as we're bringing in, as closing in the pipeline, new things go into the pipeline, so it really hasn't changed that much.
spk02: That pipeline has actually been pretty consistent for some time. It tends to get replenished at a pretty constant rate.
spk05: Thanks for answering my questions.
spk28: Thank you. One moment for our next question. Our next question comes from the line of Ben Gerlinger from Citi.
spk04: Hey, good morning. Hey, Ben.
spk13: I apologize up front. There's a lot of calls going on this morning, so I'm You guys seem to have a pretty good quarter. So I agree with the transcript while you're talking, but have you guys given any indication of kind of overall capital deployment, whether it be share or purchase or potential down the road for continued outsized loan growth? I'm just trying to get a sense of how you guys are thinking about capital given that your share price is still fairly compressed. It's had a good rebound here, but also you also had a good quarter for growth, and the Southeast in general just seems to have a better economic backdrop.
spk21: Yeah, Leslie and I were working on the board agenda for August actually just yesterday, and I told her to add a section on capital discussion. So listen, we're looking at a pretty happy set of facts here. We're seeing some growth opportunity We're seeing capital build up. And my first choice always is to actually deploy the capital and grow it profitably. If we're not able to see that for a sustained period of time, then we think about buybacks. And then, of course, in the back of our mind is always the environment, if it is conducive to buybacks or not. And also, you've heard us in the past that we are very sensitive to all our stakeholders, especially the rating agencies. who are quite sensitive about capital returns. So we're going to keep all that in mind. We'll have a discussion in August. And I don't want to get ahead of myself and say something that, you know, I'm not authorized yet by the board, but we'll have a discussion like we've had in the past. But right now we're out on the sidelines. Maybe in August we'll do something or maybe later in the year. But right now, you know, I'm looking at a decent pipeline, and if we can actually deploy this capital, that would be the best outcome.
spk04: Gotcha.
spk21: This year, we've given guidance that balance sheet will not grow from beginning to the end of the year, and I think, give or take, we'll probably end up at that level, but I want to grow eventually. Not growing is no fun. So, you know, Leslie will kill me if I start talking about next year, so I won't. But I want to get back in the growth business.
spk11: Gotcha. Are you able to say what day the board meeting is so I know what day it is?
spk29: No. No. If anything happens, there will be a press release.
spk14: Yeah, but I think that sounds good. I just tried to get in front of it by about four minutes. All right. Well, I appreciate it. Thank you. Thank you.
spk28: Thank you. At this time, I would now like to turn the conference back over to Raj Singh for closing remarks.
spk21: Like I said, you know, India winning the World Cup was the big cherry on a pretty decent Sunday. We're very happy with the way the quarter turned out. We're very optimistic as we look to the future. And thank you for your time this morning and call us if you have any more detailed questions. Otherwise, we'll see you or talk to you again in three months. Bye.
spk28: This concludes today's conference call. Thank you for participating.
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