Q2 2021 BankUnited Inc Earnings Call
Good day, and thank you for standing by and welcome to the Bankunited 2021 second quarter earnings call.
At this time all participants are in a listen only mode. After the speaker presentation. There will be question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero, Oh, and I like to hand the conference.
For 2 speaker today, Susan Greenfield Corporate Secretary. Please go ahead.
Thank you Victor.
Thank you for joining us today on our second quarter results conference call on the call.
Good morning.
Jeremy.
Lastly, the net our chief financial Officer.
Our chief operating officer.
I'd like to remind everyone.
Okay.
Within the need for the private Securities Litigation Reform Act of 1995.
Okay.
With respect to among other things future events and finance.
For performance.
Any forward looking statements made during this call are based on that.
The company and its subsidiary.
Are all of the company.
Yes.
On an expectation.
This forward looking information should not be regarded as a breakeven.
Patients.
As for future plans estimates or.
As contemplated by the company will be achieved.
Such forward looking statements are subject to various risks uncertainties and assumptions.
Including without limitation.
Operator.
Looking for.
Condition.
Strategy in liquidity, including cash.
On the COVID-19 pandemic.
Company does not undertake any obligation to publicly update or review any forward looking statements.
On top of new information future developments for otherwise.
Important factors could cause actual results to differ materially.
As indicated by the forward looking statements.
On these factors can be found in the company's annual report on form 10-K for the year.
And at December 31, 2020, and any subsequent quarterly report on form 10-Q for critical for.
On form 8-K, which are available on the SEC's website, www dot sector with assets.
I'll turn the call.
Thank you Susan.
Good morning, everyone and thank you for joining us for giving US your time for listening to our.
Earnings for Us.
For the quarter.
And then a few minutes at a 104 million.
$1.11 per share.
Compared to 98.8 million or $1.6 per share last quarter.
For the full for the first 6 months for the year that for this translates to an ROE of 13, 2% ROE weighed on 115 basis points.
Happy with where things came out for the earnings from NII net interest income continued to grow.
<unk>.
Despite.
On the tons on liquidity on the balance sheet, which I think is probably the free bank. These days.
Alright, NII came in at $198 million last quarter. It was 196.
For this quarter last year, it was $190 million.
NIM contracted a tiny bit from 39 debt.
Kevin mostly because of the elevated level of it would be interest.
Great.
On the deposit front again, a very strong quarter.
Deposit cost came down that mix improve.
Volumes grew across the board no matter, how you measure the story on the deposit side was again evaluates wrong. So just quickly getting into the numbers on our cost of deposits dropped from 33 basis points for 25 basis points for the last quarter.
At this point production.
The.
Spot balances DDA grew by $869 million.
And most of our growth was DDA and again by the way DDA now stands at 31% on deposits.
Book value was 25% just at the end of last year. So for those of you who have followed our story for some time, even as recently as a year over year on a hospital you should think of 30 percentage of promise.
<unk>.
Happy to report what has 35 per se, but.
That doesn't mean that we're not shooting for a higher number but I think the largest.
Maybe reset.
We think we can actually get.
The improvement.
Funding mix, even beyond just 31% that we're at today.
Provision for credit losses came in at a negative $27.5 million and Leslie will get into the.
Specifics on how that all the book.
On the credit front.
Our cash lots of progress.
I'm sorry for classified assets dropped by $541 million, that's a 21% drop low.
That is a temporary deferred or a modified under the cares Act also declined.
There were $762 million last quarter and now they are not for $497 million.
NPL ratio went up a little bit from 1% of loans last quarter to 128, if you exclude the guaranteed portion of SBA loans debt numbers at 107.
This increase is attributable to 2 large capital basically 1 credit.
Large credit $6 million to $9 million, it's in relationship to the C&I business here in Florida.
The relationship we've had for almost a decade.
For a large part of that decade for for 7 years or so it was we were the primary bank all in the last 2 or 3 years that we've become a participant in.
Share national credit because the company got so large.
We couldnt really.
For them from their credit needs. So.
On the large banks for the country, coupled with the primary and we've been.
British remember, it's a company that we've known for a decade.
Accounting irregularities.
Came up over the last few weeks.
And the books for this business, which is why we took.
For Standalone moving does do a non performing loans and things.
Net loss reserve against it.
We have a $31 million.
On a $30 million reserve against those loans.
Capital.
Hello by the way that charters have just to finish on the credit card net charge off ratio was 24 basis points compared to 46 basis points for the full year on 2020, so fairly steady.
Capital as you know.
We have tons of capital, we've announced a share buyback back in February.
It's still outstanding by $37.7 million is still outstanding at that.
We are adding to that.
Yesterday, the board Mantech program on the $150 million on Copperweld has already left for the last authorization. So.
I think over the last couple of earnings calls I've metric that debt.
And we've taken with buybacks is that moving more opportunistic rather than just any vital but every day and the reason for that is we expect this to be a very volatile market.
Even a little bit of bad news. Good news can really move stock price a lot, which is what we're seeing right now so we're going to use that to our advantage.
It would be optimistic.
Where the stock's trading guidance, it's a fairly easy decision what to do.
CET, 1 capital surplus capital at 13, 5% Holdco for 51% of the back book value again is to grow book value was $33.91, now tangible at 33% rate so very happy about that.
Progress upwards.
This quarter.
I think the longest hiatus, we've ever had.
This quarter.
Our value and the hiring business.
Brought in producers both on the left and right side of the balance sheet across business for base business line. So this is exciting we have not done that for for a full year, which like I said it was the longest remember card without bringing this deal.
Producers.
The EBIT margin a new business line.
We were all business business.
The HOA deposit business, we've always been in this business, but not organized as a separate business line, but we did that to see a big opportunity.
Okay.
You've made a couple of hires again on the production side.
And.
Those hires will be starting soon so very excited about what that business will do for us over the course of the next 3 or 4 years.
Yes.
This quarter.
Sure.
Last quarter, if we can exploit PPG loans are low growth was negative 500 volume drop numbers.
This quarter.
We still have a negative number but.
It's small compared to how much decline we had in loans last quarter.
Sure.
And as I look forward to where the pipeline is I am actually very.
Optimistic about what third quarter and fourth quarter would bring to us.
Especially for the commercial side, especially as the C&I business.
On the CRE front the pipeline for also getting better, but C&I pipeline for much better and Tom will get into the details of the visit look for but as we see into the second half for the year. The best we can tell.
We will most likely make up the the reduction that we've had in loans again, excluding PPP loans, Texas a different animal.
So the cash.
These healing.
Both in New York on Florida, Florida for the ahead of the European assets in the past, but even in New York is showing very good signs.
We are obviously watching.
How the healthcare numbers evolve that can change at any time. So we do keep an eye on that very closely.
But overall, it's been a very positive picture.
We have opened up.
And for our employees back in a capital weighted.
We're not completely back to the office.
But by Labor day.
Our goal is to.
Net to the new normal.
There are a number of people work.
On a hybrid fashion, others would work for both for some.
The World Cup permanently 5 this week at the office. So all of those what we call. The <unk> will return to office.
Laid out for as we speak and we expect that by Labor day, we will be the new normal.
Again.
The caveat, obviously is the health care coverage.
Watching.
What else.
Im going to actually.
Turn it over to Tom.
So a little more detail.
1 more thing, which Leslie just pointed out to me.
The other change.
On strategy.
But that is fait recent over the last for 3 months or so.
First time.
In the history of the company, we are beginning to think about geographies outside of just New York on Florida.
In the past, we've set New York and Florida is about.
As much for the market as you want because it's just hard for.
Flying back and forth between these 2 markets, but if the pandemic has taught US anything is that you don't have to fly back and forth. All the time to cover to market. So if thats. The case that there are other markets that would work well with our business model.
Generally.
Business dense urban markets.
We are beginning to look at.
Have discussions with to see if we want to expected for this quarter so nothing to do.
To announce.
Early phases, but I wanted to share at least our thinking.
Geographic expansion much for Florida actually happens so when there is something more cap rate for Portugal come talk to you about it but we are beginning to at least thinking on those terms that conscious.
Miami in Manhattan.
But other markets like also can add to this franchise over time.
But with that I'll turn it over to Tom who will walk you through more detail alright. Thanks Raj.
So, let's talk a little bit about the deposit side for.
<unk> overall average non interest bearing deposits grew low.
$673 million for the quarter by $2.9 billion compared to the second quarter of 2020.
For the period basis, non interest bearing DDA as Raj said grew by 869 billion for the quarter. While total deposits grew by 877 million net <unk>.
<unk> has now increased 26% for the year to date basis. So what's really good about that is it's another quarter, where we've seen really strong growth.
At all of our business lines, it's a broad based support of <unk>.
Continuous so that our DDA new relationships most of the growth was driven by new logos, because we get to the organization, New Treasury management relationships, which is showing.
Showing up strongly on our fee income lines for true up 31% in terms of service charges. So we're seeing good good supported all of these areas.
Time deposits declined by $806 million.
Money market and interest bearing checking grew by a total of $815 million. So we're seeing some movement from time deposits for money market product as we've lowered.
Right. So the CD side retention has been good at actually as I said a lot of this money has been moving to the money market accounts.
On the load side, it's been a little bit of time on this should follow up on some of Rogers.
While we did have a decline excluding the PPP loan forgiveness by $56 million in the.
Quarter, it begin to feel like a more normalized quarter residential growth was 494 billion for.
For the quarter, including both the residential or the <unk> side and I think most importantly for us as a indicator C&I loans were up by $186 million for the quarter.
Which is really really a good side for us it's 1 of our major business lines. It's the first time that this latest growth since.
Since the onset of the pandemic so that was really good to see.
It also that are just as good as the $186 million what was nice as it was a good blend.
New relationships into the bank.
As well as existing clients increasing credit for some of these during the quarter. So.
<unk> wide utilization has been a challenge for the industry has been a challenge for us.
We're at relatively low historic rates for the utilization perspective. So it was nice to see clients start to move back to a more normalized basis 2 transactions being noted the quarter.
On your M&A activity baked on ended the quarter so.
On the blend was good and we also within the C&I business.
If we looked at the business. It was a strong back end of the quarter June was particularly strong.
We saw transactions in a number of different industries at 1 point I looked at the pipeline for closing of Jude.
We had some big like 80 deals on all 18 different industries. So that was nice to see for both from a diversity.
Perspective, so given the pipeline activity that we're seeing now.
We expect to see growth for the second half of the year.
We will see a better commercial real estate.
The environment, we had $225 million of Cree.
Right on through the multifamily business that will pretty much taper off at.
At this point as you can see from some of the supplemental information.
Multifamily in New York portfolio has now been cut of reduced for what I recall, a pretty stabilized level. This has been kind of a 5 year process.
This reduction and I think now we're kind of business stabilized.
Level.
The other day it was good as Raj mentioned, we've made a number of key hires.
<unk> segment on the deposit side reported producers on both.
Sides of the balance sheet.
Better.
A strong player in this market and I think this is an opportunity for us to really significantly grow this business over the next few years, we also added.
Capability to our healthcare practice team.
Which is important to us as we hired several commercial producers that kind of 1 of our core Florida C&I type keep so.
The cadence in the field.
It feels like it's starting to return to kind of a durable ice basis for us from a business business production colleague perspective, it warmed up so a little update on the PPP.
$438 million of first draw PPP loans were forgiven in Q2.
June 30, there was a total of $209 million PPP loads outstanding or the first for our program with 283 billion outstanding under the second drive for our grip forgiveness applications or a process for the majority of the first draw low for our progress.
Slide 8 of the debt provides more detail on this.
Quick update on deferrals of care modifications slide 17 to the supplemental deck also provide some data on this on the commercial side only $3 million of commercial loans.
It's short term deferral as of June 30, 436 million of commercial loads for based on a modified terms under the cares Act for.
The largest group of loans still under the cares act or is it the hotel portfolio. Although the total cares act modified loans and debt portfolio declined for.
For $343 million.
March $31 million to $225 million.
June 30th.
See particularly Florida were about 76%.
Of our hotel portfolio.
As we've seen a pretty strong rebound the tourism.
Florida any of US that have tried to book hotel rooms at Florida recently, it sounded pretty difficult to do it.
At high rates that we're seeing.
Strong rebound that occupancy, particularly travel related.
Beachfront property occupancy with it.
The overall, Florida book So.
That led to the significant decline that we had there we expect to continue to see improvement of debt too.
$218 million on commercial loans rolled off of deferral of modification this quarter for 100% of these loans with either paid offer resumed regular payments.
On the residential side, excluding the Ginnie Mae early buyout portfolio.
$8 million or below Gerard short term deferral for the modified under a longer term cares act repayment plans.
<unk> 30.
$532 million of residential loads that were granted an additional payment deferral $493 million per day to 3% of rolled off of those that have rolled off day to 3%.
That'd be the paid off for our Medicaid regular payments.
Just some selected data on our credit portfolio.
Rent collections on commercial properties remained.
Very strong wood, we looked at larger clients that selected data that we see.
For the office portfolio right.
Great collections of <unk>, 8% actually both in Florida, and New York.
Strong performance in multifamily, 96% at Florida, 90, what percentage in New York.
Retail <unk>.
Collections were 95 percentage, Florida, 85% in New York.
We continue to see some improvement on the New York retail.
Market as I mentioned, a little bit earlier.
Florida Hotel market is particularly about stronger all Florida, All New York properties are now open.
Occupancy averaging 75% for the second quarter of 2021.
Excluding what New York Hotel, but did not open until the end of the second quarter.
A good overall rebound did.
That market, so with that I'll turn it over to Leslie for some more detail for the quarter.
Thanks, Tom.
You mentioned NIM was down slightly this quarter to 237 from $2.39 in large part due to even stronger than anticipated headwinds from high levels of liquidity cash was elevated and liquidity was deployed into the bond portfolio, which file accretive to net interest income is not accretive to the margin.
On loans this quarter increased to $3.59 from $3.58 last quarter recognition of fees on PPP loans that were forgiven added 11 basis points to that loan yield this quarter compared to 6 basis points last quarter. So without the impact of PPP origination fees the yield on loans would have declined by 4 basis points.
For the quarter, just due to net turnover at the portfolio towards lower yielding assets in this environment.
We have $9.8 million of deferred fees on PPP loans that remain to be recognized.
On 1 million of this relates to first draw on the first drop program on I would expect most of that to come into income in the third quarter and $8.7 million relates to the second trial program and I really wouldn't expect to see much of any of that in the second quarter.
The yield on securities declined from $1.73 to $1.56 that was somewhat more than we had anticipated.
Retrospective method of accounting adjustments related to faster prepayments on mortgage backed securities actually accounted for 10 basis points for that quarterly decline and the rest of the decline obviously just attributable to turnover in the portfolio for a slower rate environment.
As Rob said the cost of total cost of deposits declined by 8 basis points quarter over quarter with the cost of interest bearing deposits declining by 10 basis points.
With respect to the FHA advances there is still $1.1 billion of cash flow hedges against <unk> advances that are scheduled to mature over the remainder of 2021 with a weighted average rate of 2.4%.
We estimate for talking about the impact on the NIM is higher levels of liquidity, we estimate that if we simply if.
If we normalize elevated cash balances that accounts for about 8 basis points. So even if cash balance has it been normalized the NIM would have been 8 basis points higher.
We estimate that if we also normalize the level of securities.
<unk> 14 basis points, so that impact on NIM on high levels of liquidity to somewhere between 8 and 14 basis points, depending on how you think about it as a pretty significant.
As Raj said, we currently expect the cost of deposits to continue to decline next quarter and we currently expect the NIM to be stable to slightly higher however, liquidity may continue to be a headwind there.
Moving on to the provision and the allowance on.
Overall, the provision for credit losses. This quarter was a recovery of $27.5 million slides 10 through 12 of our debt provide some further details on the allowance for credit losses.
<unk> declined from 95 basis points at March 31 to 77 basis points at June 30th biggest drivers of that change $19.4 million of the decrease related to the economic forecast the largest impacts for improvement in the unemployment outlook.
And improving HCI in commercial property forecast.
Reserves decreased by $17.6 million due to net charge offs.
And to $16.2 million due to portfolio changes that bucket include things like the net decrease in loans shifted in teens portfolio segments with lower expected loss rate such as residential as well as the impact of.
Yes loans, moving in and out of the portfolio and improving borrower financial statements spreads.
$12.8 million decreasing amount on qualitative overlays that had related to some uncertainties around the COVID-19 pandemic that seem to be.
Resolving themselves.
On an increase of $27 million related to risk rating migration. Most of that was the $27.2 million increase in the reserve related to the $169 million commercial relationship that Raj spoke about bringing that reserve up to $30 million.
The largest component on the reduction in reserve lists for CRE portfolio, because that model is particularly sensitive to unemployment and property forecast. Similarly, we saw a reduction on the residential allowance again related to improving unemployment on HPA.
Hi.
On high reserve actually increased this quarter on the loss rate basis, and that was again due to the large reserve on the 1 level.
Total credit criticized and classified loans declined by $541 million special mentioned down by $282 million in substandard accruing down by 299 million substandard non accruing loans increased by $40 million again back to that.
<unk> come on top.
Looking about.
Couple of notes on other income and expense with respect to operating expenses, we saw a decline in comp this quarter as expected Q1 is always somewhat elevated.
Insurance expense came down correlating to a reduction in criticized and classified assets.
Continue to see increases in deposit service charges and fees stemming from our Treasury management solutions initiatives that we initiated in conjunction with Bankunited 2 point out 1 more thing I just wanted to mentioned we're on click out with respect to the tax rate I would expect it to remain around 26 consistent.
Consistent with the uncertain tax positions disclosure, we made on our last 10-K, we have very recently entered into discussions with the state of Florida.
Regarding several outstanding tax matters.
Possibility that these discussions could result in recognition of a benefit somewhere in the next few quarters. These discussions have just recently gotten underway. So it's too soon for me to be much more specific than that so with that I'm going to turn it over to Raj for some closing comments.
While <unk> was.
Focusing on just slipped up on my.
Deposit per report, which I get every day and so as of last night on deposit cost was at 20 basis points.
No.
I feel pretty comfortable in saying that we will be the teams this quarter.
Might be in the teens as early as next week.
So I know in the past I've said that we think we will end the year.
On a spot basis and the team's I'm happy to say that we're about 5 months ahead of schedule.
And by the way deposits come into growth truth be told while I'm very excited about deposit growth that has come in liquidity is a problem. So.
This would have been on even better reported we attempt to yield that we actually kind of flat.
So we're trying to.
Succeeding pushing out anything that you think as price sensitive as a part.
Card us in the future when rates rise of Inc.
2.
To increase the quality of the book.
But for some day rates will rise.
So.
It is.
If I look back 6 months ago would be cockpit play itself out overall.
On the deposit side, we're much further ahead of what we constantly going through this year on the.
The loan front.
We're further behind that will be coffee would go.
And I would think about them having here for the next 6 months I still see a lot of.
Good news on the on the deposit front because by -2 good money for coming in and cost of funds is still declining further than we ever thought it would.
And alongside pipelines are now beginning to look normal. So also a point that Tom made guidance, what I repeat that may have gotten lost.
Multifamily in New York has been for big headwind for us on off from that portfolio for the big headwind for us because exactly 5 years ago was when we changed strategy emphasized for multifamily.
5 year anniversaries of literally around.
Of this month.
So as that portfolio matures, and those payoffs and sort of natural runoff gets behind us.
Look forward, we don't see the same.
<unk>.
Payoffs happening because.
Because that portfolio is kind of getting.
To a normalized pace. So that is also from us from a from a payoff perspective, a good story and I look forward over the next couple of quarters compared to the last couple over the last on just last couple of quarters for the last 5 years.
No.
Just wanted to make that point, but.
We will turn it over to <unk>.
Moderator for questions.
Okay, we'll take questions.
As a reminder to ask a question you will need to press star 1 on your telephone.
A question just for simplicity.
<unk>.
Once again Thats star 1 for questions.
Our first question is on the line then Denlinger from Hovde Group you may begin.
Hey, good morning, everyone. Good morning Ren.
I was wondering if we start on slide 23.
Non performing loans.
The big uptick I can totally understand that's got 1 major C&I credit, but if you back that out when quarter looks to be.
Roughly flat and then as Tom work through the credit information it seems like everything is.
Not only positive, but it's working in the right direction as well. So I was curious if you could shed some more color on non.
Non performing loan balances in general and then also the credit that you guys called out it.
It seems to be <unk> 30, you said $30 million reserve.
It seems to be pretty high as a percentage of reserve relative to the total loans I was just curious.
Color on the confidence there and.
Terms of the snake.
Performing moving forward.
Okay.
On that low.
Our stilled.
Cash a lot of information.
We will actually come a lot more on about 2 weeks side about exactly the collateral coverage, we will have a value all the collateral there. So that was our best cash obviously, we can peel off and.
Keep doing this over and over again. So we just took on would be hard for the conservative and are for.
Corporate level of reserve.
But we'll know a lot more of that day to about 2 weeks time to solve have played itself out over the last few weeks.
Accounting irregularity, it becomes much harder to understand sort of the extent of growth.
The problem that might be because you can't really rely on the numbers that we presented to you.
Yes.
Almost.
<unk> falls outside of credit losses pick up more like a fraud losses.
So that's what we're dealing with that it is not like a business slowdown and we saw this happening and we can for kind of predict how it will come back up.
Just suddenly the numbers on human relying on our tour for pay for their rate that's the situation.
But we're dealing with.
So we're value collateral we think we've made are appropriate and conservative estimate.
For the reserve needs to be.
But we'll know a lot more like I said on a couple of weeks on Trulia.
For the coming quarter.
With respect to the rest of the population.
This is for the most part I mean, there have been some small ins and outs, but for most the most part for the last 8 quarters. This has been a relatively stagnant population of loans that are in our capital recovery Department and just working through that.
Other than this 1 loan that Raj just mentioned.
Theres, a little ins and outs, but for the most part. This is just the population of loans that make on working out for the last few quarters.
Are hopeful that we'll see that correct.
Wind down.
Thats out on this 1.
Okay.
Okay, Great. That's really helpful color and then if we could just kind of switch.
Gears here Raj you seem pretty optimistic in terms of.
Gross debt.
You've transitioned from a giant question Mark at the beginning of the year to be in a sense of positivity and now you guys are taking the offensive approach on hiring lenders looking outside of your markets.
<unk>.
I was curious if you can kind of maybe potentially explain.
What your loan growth targets might be.
In terms of the end of this year or even a year from now.
Sort of areas, we don't want to growth growth in general what would your debt would be.
Good Mark to have in terms of growth.
Yes, so for.
This year I mean.
Factory over the first for first quarter and were down $5 billion. This quarter, we're down about.
Roughly $50 million.
And by the way for the quarter and closed 1 day earlier without having doubt we have today on some of the value last day, which really.
Annoying when that happens, but we did have unexpected payoffs for the last day, we were actually going to have a positive quarter, but nevertheless.
Sure.
The first 2 quarters have been negative quarters I'm expecting the next phone could be positive quarters.
In the past, we've said we will probably have.
Very low single digit.
Percentage growth.
Which is kind of what it still feels like.
It is hard to predict in this environment.
It is non enrollment environment yet.
I would not even.
Dan or try and predict what next year would it be like I think Covid you do see things settle down a little bit more but just for this quarter I expect that next quarter on third quarter fourth quarter to be positive.
And for us to kind of make up for what we have.
Losses in terms of balances on over the first 2 quarters.
Thanks.
My optimism comes really from the environment, but more importantly, seeing the pipeline.
So.
When I spoke on the top every couple of week guidance looked at.
Especially the commercial C&I pipelines are.
There.
For the best place to have been since the pandemic started.
Yes.
And line utilization, while it is still low it has been improving the bottom was February end of February was the lowest bidder on line utilization was it has increased.
Slowly, but surely every single month with the exception of June for the last day of June when we had some pay downs.
When it went down a little bit, but overall the trajectory is pretty healthy.
And on our forecast is for cash.
And we'll go back to normal by the end of the year just hang on we'll go back to halfway good normal and if that happens we will have.
A decent second half yes.
Thats 1 of the reasons why I made the comment about where our production came on.
In the second quarter, which as you know there are things that we proactively control, which is new relationships colleague.
You did new clients into the bank and I think when we look at the pipe lives covered for that activity.
Activity it looks pretty good right now the fact that we don't control this.
Line utilization of existing clients, but the fact that we saw.
A good portion of our production.
No.
Light increases during the quarter clients to redo transactions.
While the utilization didn't move much because some of these paydowns.
Raj mentioned that we had at the end of the quarter. The overall feeling good sets of net about clients doing more activity see more activity revenue started to grow up a lot of our credit facilities are formula based facilities. So as sales does receivables go up inventory goes up and you could have we would expect to start to see.
<unk> continues to recover more line utilization. So if we get both of those going in the same direction.
Same time that I think that's going to be a much better story.
Great. That's really helpful. If I could just sneak 1 more in.
I know expenses has always been a little bit volatile, especially with Wisconsin.
There are moving pieces outside of technology spend that is an important investment for the bank is this.
<unk> has a good run rate or should we expect something a little bit higher going forward.
I would say over time, that's probably going to creep up a little bit you know, Tom and Raj both refer to hiring more dealing of some producers do I think thats going to materially move the needle on that run rate in the near term now.
But we are we are seeing that however on the flip side that should also lead to more than that much less people are starting to keep or theyre not going to be here long. So that should lead to an increase in revenue offsetting it but I would say there is going to be a little bit of upward pressure on cost because we are actively hiring and I think the other thing that's going on.
On in the comp number right now are our variable compensation accruals have been increased over the prior year again in anticipation of a strong second half on a pick up on revenue so thats actually great news.
Okay, Great I appreciate the color guys.
Yes.
Our next question comes from the line of Jared Shaw from Wells Fargo Securities You may begin.
Hey, good morning, everybody.
Hey, Dara good morning.
Maybe maybe sticking with the loan growth outlook.
Look yes.
Hi, good optimism there is that on the C&I side is that really just more broad base with being able to start to penetrate those.
New customers for the bank that you brought in on the deposit side or are there certain industries that you're seeing more strength, whether it's free.
<unk> franchise finance or for whatever.
I guess, maybe a little color on on what Youre seeing in the pipeline there.
No.
Good day.
That's.
For sure.
Okay.
A careful and from a credit perspective, we have not increased our risk appetite for credit.
We're still being cautious on that front, but it's mostly coming from a very healthy economy in Florida, especially and also remodeling economy in New York.
Which is a few months behind.
But.
No.
It's not like.
Not on a composite pipe for warehouse selling.
Sure.
Credit product.
It's more coming from the fact that as income.
Denis is rebounding very strongly in Florida.
And.
We are benefiting from that and.
Harvesting.
The good news over there.
Yes, I would say, it's pretty broad based growth.
Referred earlier when I looked at the closing production for the quarter.
There were there were no 2 deals of the same industry. So it could range from a multinational company in Orlando that manufacturers toilet paper to renewable energy too.
Communications to healthcare as it was a broad number of industries.
Across the board in the segments that we serve.
Okay, and then on the on the HOA business.
It sounds like that's primarily or exclusively deposit right now is there an opportunity to have that become a lending product.
No thats actually for that expansion.
Yes.
A small element of credit in that business, but that's not really what the business is about <unk>.
Credit is generally.
10%.
Volker deposit that's that's probably a high number it really is on deposit business.
And I want to clarify we have been in that business for a while but it was just.
Nevertheless.
Bill.
Organized as a separate line of business or have some line of business. So we're putting some resources behind it and spend some money on technology.
And then we'll go to market on it.
In international business for Us actually because when we do a lot of it in New York in Florida, We do have clients outside so more recently, some banks have actually stepped up and bought platforms for spending tons and tons of.
Money on goodwill and intangible.
We think we can we can grow that organically.
Dot spending that kind of capital.
Capital.
The production, particularly when we acquired it towards a new people have a national footprint in terms of their client base.
Okay, and then when you talk about.
We're looking at other geographies as being potentially attractive.
How should we think about entering any of those would that be.
If you come across a person or a team that has some good relationships in the market you would do that or would it be a bigger.
Once you identify on market it would be a bigger entrants with potentially a branch or potentially an acquisition or a bigger.
Slash than than just 1 or 2 people.
Yes.
Yeah.
First of all.
Look at the way we entered other business in other geographies over the last 10 years taxes on it will be similar to that which is going to be a small separate on new geography with a small team and then slowly grow it overtime.
Acquisitions are always possible, but it's never our primary strategy for you all just try to find ways for do it ourselves and we can because there is something special that you have to acquire it and we're open for that too.
But on <unk>.
History will tell you on that.
Something we lead with the obviously because organic growth so.
We are it has to be a market that makes sense for us it has to be a healthy market. It has to be market for our business model would work or not.
Not every market is like that.
Unlikely it will be our philosophy around kind of on the scaffold is an example.
But it will be somewhere.
Yes.
Within let's say the eastern Seaboard.
So we are looking at markets from Boston, all the way down to Atlanta.
And beginning to engage with the teams to see where we could actually get.
What's the health of these markets what is the health net lending markets what are the pricing dynamics.
They are quite different from from from 1 MSA for the other what is the competition rate and than.
Most importantly could.
Could you find like minded people moving work well.
Family.
Great and then maybe just finally for me for Leslie.
Securities portfolio went up about $1 billion. This quarter can you give any detail around.
And with the purchase yields on duration is like an aside.
<unk> the overall interest rate sensitivity at all of the bank.
So the purchase yields are compressing, but they are what they are there is average just under 1% for the quarter. The composition of the portfolio. It has not changed materially because of the purchase activity and we've made a conscious decision to keep the duration of the portfolio short carried it always has been we don't believe that business.
The time to take duration. So we're still going on we're keeping the duration of the portfolio.
Sure.
Yes.
<unk>, probably a little larger than we'd ideally like it to be right now.
But it's better than letting it sit in deferred operating 15 basis points.
Great. Thank you.
Our next question comes from the line of Dave Rochester for at this point you may begin.
Hey, good morning, guys.
Good morning day wanted to go back to the the loans trajectory for a minute I appreciated all the color there you'll definitely get some nice lift without multifamily runoff going away, but you've also had some decent run off in the bridge book as well that was another I think $100 million on top of the $2.50 for multifamily. This quarter. So just wanted to get your take on how you see that book trending.
And when you think you'll hit bottom there.
Yes, I would.
I would say I'd split the answer to that into 2 pieces..1 is the equipment piece.
Others, the franchise finance piece of it.
I'll take franchise for.
<unk> ended the quarter at about $463 million we.
We will probably continue to prove that a bit to take out concepts that we don't think are the long term concepts that business I would expect that to trend down a bit over the next couple of quarters, we do see subdued transactional opportunity.
And that we're looking at.
For a 5.
Deals right now or Mcdonald's focus that I think are good lucky deals. So that will that will probably drift down but did stabilize as we get to the end of the year. We've got a couple of more concepts that we might want to.
Cleaned up a little bit and we will probably continue to reduce what are the fitness concepts a little bit where there are sale opportunities are.
There is some transactional volume going on to the fitness.
You'll see some aggregation of operators in that area.
For the equipment side.
I think that will also continue to trend down just a little bit.
There is not as much transactional opportunity maybe the equipment finance area right now, we're not seeing as much return to stronger Capex type spending there.
Frankly, right now the deals that we're seeing are fairly long duration.
The opportunities are there are fairly fed rates. So it does it will give us sort of great economies as we looked at the trade off between between credit risk.
<unk>.
Like in other businesses that we're in.
Take.
Sub 2% type risks for 10 years.
Past level credit doesn't make an awful lot of sense.
I doubt I think we'll just.
We'll see.
Growth in other areas of the portfolio that we've got better returns or to cope with deposits and treasury opportunities and things of that nature.
Okay. So you've got run offs of siding.
Bridge, you've got the multifamily portfolio basically stabilizing it sounds like in <unk>.
It seems like different Tas still pay down a little bit rate the rate.
The decline will slow considerably.
But it just seems like to.
To your point the rate of decline slowing pretty significantly and your positive commentary on the pipelines and growth in other areas. It seems like you guys are per poised for some pretty decent loan growth here in the back half for the year.
Fair.
Yes.
Yes good.
The capital it sounds like you are.
Perhaps not to get aggressive here, just given where the stock is trading.
Is the buyback.
As far as that goes so if you end up wrapping this up in the shorter term do you see more excess capital behind that.
Would there be a willingness on your part to put out another plan not trying to get too far ahead here, but just wanted to understand how you think about excess capital right now, yes, we will be back.
Volkswagen.
The board would make a decision but.
There's a lot of excess capital here.
I can see on screen kind of a 150 right now for that.
Great.
And then maybe just switching to your securities investment strategy. How are you thinking about growing the book now just given the newer lower rate environment that we're in at this point.
You end up getting more excess deposits in the back half of the year.
So obviously, we see stronger loan growth on the horizon and yes, it would be our desire debt.
It would not be growing the securities book from here, but debt.
Growth on the balance sheet would be we'd be seeing growth in for loan book instead of the Securities book and as Raj mentioned earlier, we are also in the process of actively incentivising.
Depositors, who we believe will be rate sensitive in a different rate environment to take their deposits elsewhere. So we would not be disappointed if we didn't see total deposits grow next quarter, and we want to see ni DDA growth.
Mike.
Desire would be that we don't see the securities book growth materially next quarter, however to be honest, if we find ourselves on the same physician where in this quarter, where we have a lot of excess liquidity, that's where we'll put it.
Okay.
Declined by $1 billion, so, let's say, yes that would be.
Reduced cash on the other side of the balance sheet not lose any earnings, but you'll free up $80 million of capital capital buyback stock what are we trading at.
1213 times book value accretive to EPS.
So yes.
I wouldn't be concerned if we end up on that.
Yes.
Our balance sheet on balance sheet would be a good thing, yes, yes, Zach sounds good maybe maybe just 1 last 1 on fee side I saw the book.
Bump up in lease financing revenue this quarter and I know that can bounce around a little bit but are you finally, youre expecting that the the decline that we've seen over the past several quarters to have subsided here, maybe stabilize going forward or do you still see some FIFO My best estimate Dave at this point on it's pretty much stabilized for the foreseeable future.
Great.
Alright, Thank you very much I appreciate it.
Yep.
Alright, just a question on Sunshine.
<unk> Gailey from <unk>.
Yeah.
Yes for <unk>. Thanks, Good morning, guys, writing thought you switched for.
Okay.
Still here.
I wanted to ask I wanted to ask just another 1 on the C&I nonperforming.
Sector was debt and then when you look at your total loan portfolio can you remind us what the percentage of total loans that are shared national credits.
The sector is.
Retail and wholesale distribution.
Commercials of heavy construction equipment.
It's obviously in the southeast part of the country.
And while technically this fall on.
Under a snick category I wouldn't really call. It that we have deposit relationship here. We've learned the primary bank for the longest time and only because of the size of this thing growing for a place that we did not want to go on.
This became sort of a club deal.
Overall the deal that was large enough business has to be called a snake, but this is not for 1 of your typical mix within the capital markets.
Yes, Mike.
Large money Center bank caused 17 banks and says for once a day at $20 million per deal.
Somebody.
Business.
A company as we've known it bank for a long time.
So which is why it's even more painful to see us.
The way that's gone.
The definition of a snick is over 100 billion total.
Credit committed 3 or more banks. So I mean, it's not as Rajiv said this is a true.
Multibillion dollar deal, where you have 48 bags, it's really a club deal.
Unfortunately, we have for a long standing relationship growth company like Ross said that makes us even more painful.
Okay, and then Raj you mentioned you're back on.
On offense Youre hiring people get can you maybe size out how many people you hired in the second quarter and maybe just talk about.
How many people you could higher going forward.
I put that for the second part for the question.
All of those AD hoc how many people you'll be moving on to what we are having multiple discussions.
Tom do you remember how many have you hired.
I'd say its probably about <unk>.
6 or 7.
Yes.
Okay, and then last experience to some extent the future hires also.
A very opportunistic issue I mean, if we find.
Terrific producer at a market.
Whether we have an opening or not we're going to hire the value.
We're the Hajj for talent every day.
Yes that makes sense and then lastly, I heard you have $9.8 million of PPP fees left can you tell us how many PPP fees were actually taken in the second quarter, the dollar amount for $5 million.
Great.
Great. Thank you all.
Yes.
And our next question comes from the line of David Bishop from Seaport Research you may begin.
Yes, good morning, good morning Gabe.
Hey, Leslie.
Quick question for you just in terms of.
Quarter to quarter change just curious how the balance sheet looks from our interest rate sensitivity positioning just curious if you have that.
On that updated relative to last quarter, let's different not much different day. The balance sheet has been for some time and continues to be moderately asset sensitive, it's probably a little bit more assets now.
Then it was a quarter ago, but.
So in the same range and Thats kind of what we try to manage to.
And in terms of I guess loan floors just curious.
Get a sense in terms of how much we have to see rates rise before we start seeing some of these loans coming on.
Coming through their floors is it isn't a big impediment in terms of repricing, it's not a big impediment, Tom correct me, if I'm wrong, but I think the only book, where we have really meaningful operating floors right now for mortgage warehouse book for the rest of the book cast on floors, but they're pretty low correct.
Got it.
And then Raj in terms of maybe a high level commentary.
You mentioned that the run off I guess, the New York multifamily is probably nearing.
On the endpoint here, a broader view of that as an asset class here or do you think debt.
We will eventually begin to grow again and maybe just your view on New York multifamily in general at this point.
Okay.
Wholesale asset class and its very hard to generate deposits.
Would think it would be.
It really is.
We do compete with some banks that for them, that's still on the asset class, which makes it hard to compete with.
It is.
Overall, the New York market, obviously has had suffered more in this downturn.
Let's say in Florida.
Which also.
Our plans for this asset class.
I'm still not very bullish on New York multifamily is a class a class I would not want it to grow at least not very meaningfully.
What we will be less rate on a quarter relationships, where we have deposits that we have the entire relationship and it's not just loans that would be.
Boston on broker so.
If we can grow that business so for sure on growing.
And as such on wholesale brokerage revenue.
Industry.
To have real.
Substantive growth measured in billions of dollars you really have to go through.
The broker channel.
Think of this as almost buying bonds that's the on.
On the way you've been really get a lot of growth.
I don't expect that we will end up with a lot of growth in New York multifamily, but I think we'll always have it as an asset class on stable.
For them that it is at right now.
Yes, I would also add that EBIT EBIT prior to the pandemic.
The.
Regulatory changes that went through.
Recently, a year and a half ago or so at the New York dramatically changed the economics of the business long term economics are.
These are 5 year loans for most part so if you go out and say, okay. What are the.
The cash flow projection is going to be 5 years out based on those changes that happened just before the pandemic.
No.
Those pay the debt service coverage ratios look on me.
5 years out.
That is a concern that we never used to have but new York multifamily, but for now it's something you kind of put in kitimat.
Operating expenses in that business are just growing faster.
On our rent growth good growth. Therefore is theres just compression in NOI.
Got it.
Then maybe turning back to credit obviously.
The improvement in the economic forecast driving the lower.
ACL ratio just curious when things do start to bottom out in terms of.
In terms of having to provide for loan growth just curious where you see yourself maybe preserving at from a.
On a percent of loans perspective, moving ahead.
Before per pandemic hit rate what was on.
Seasonal coverage rate basis, and so I would say you know, Dave and Ive said this before and these kinds of things are.
Difficult at best to predict with a high degree of precision.
I would say, we see the economy really close to what it looked like.
When we put that day, 1 seasonal return on his portfolio composition is consistent with where we were then I would say, we're going to drift back to that 60 basis point level.
Right now the portfolio competition low more tilted toward residential than it was for them, which carries a lower return.
Well.
Even with more commercial origination heading back there probably makes as much sense to me as anything can I say definitively when we get there no because some of that also depends on continued upward risk rating migration.
The nature of production believe me I would be very pleased to get back to replace for we have a positive provision in the quarter because of loan growth.
And then moving that would be yes that would be a good thing, but I think my best the best way to look at it is probably we're headed back towards that 60 basis points.
Barring things looking going in a different direction economically.
Got it appreciate the color.
Thank you.
1 quick question Star 1.
I'm not showing any further questions in the queue at this moment.
Thanks for to turn the call back over to Mr. Raj Singh for any closing remarks.
Thank you everyone for joining us and listening to us for rate will talk to you again in 3 months.
Thanks.
This concludes today's conference call. Thank you for participating.
You may now disconnect.
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