BankUnited, Inc. Q1 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to BankUnited First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Susan Greenfield, Corporate Secretary. Please go ahead.

Thank you, Lydia. Good morning and thank you for joining us today on our first quarter 2024 results conference call. On the call this morning are Raj Singh, our Chairman, President, and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries around the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including without limitations, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking 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-K, which are available at the SEC's website, www.sec.gov. With that, I'd like to turn the call over to Raj.

Thank you, Susan. Welcome, everyone. Thanks for joining us. We'll get straight to the numbers. We announced this morning an EPS of $0.64 per share, with a net income of $48 million. I checked a couple of days ago, and I think our consensus was at $0.60, so I'm pretty pleased with where we ended up. There's not much noise in the numbers this quarter, just one item to mention, which is the $5.2 million for additional FDIC special assessment. Other than that, the numbers look clean. This quarter's highlights include a significant growth in deposits, with non-brokered deposits increasing by $644 million, mostly driven by DDA where $404 million of that growth was DDA. Our DDA to total deposits ratio is now back up to 27%. As in previous quarters, we continued to reduce wholesale funding, which is down $1.4 billion this quarter. Looking back over the past 12 months since March of last year, our total deposits have increased by $1.3 billion, and we've reduced FHLB advances by $3.6 billion. In fact, FHLB advances are at their lowest level not just in the last year but in the last two years, going back to the first quarter of '22. We're pleased with our improvement in the balance sheet and funding mix. The cost of deposits rose by 22 basis points, with the average cost for the quarter at 3.18%. The key point here is that we have stabilized the cost of deposits; it remained consistent throughout the quarter. We experienced a significant CD cliff this quarter, and nonetheless, reaching this stability in the cost of deposits is an important milestone. Even though it has only been a couple of weeks, it appears we have achieved that stability, which is good for margins. We initially expected this to occur in the second quarter, so we're happy it happened a bit earlier. As we continue to reposition the balance sheet, residential loans, which have been declining, fell again by $152 million, and we intend to maintain that trend for the remainder of the year. Commercial loan growth is typically our slowest, and while production met our expectations, we faced some unexpected payoffs and a drop in line utilization, resulting in negative loan growth. The margin for the quarter was 2.57%, slightly down from 2.60% last quarter. We had indicated that the margin would be relatively stable, possibly down a few basis points, and it came in just as we anticipated. Credit conditions are favorable, with non-performing assets and loans down, and charge-offs are minimal, coming in at just 2 basis points this quarter compared to an annualized 9 basis points last year. NPAs are at $119 million, down from $131 million last quarter. Excluding SBA-guaranteed loans, the NPA ratio is down to 23 basis points, showing a slight improvement since December. Our capital and liquidity remain strong, and both book value and tangible book value are solid, which makes me quite satisfied with how the quarter has unfolded. Tom will provide more insights on this, but our loan and deposit pipelines look promising. Regarding guidance, putting together plans at this time of year can be challenging due to market volatility, but we are tracking very closely to our expectations, which makes me happy. Therefore, there are no changes to the guidance; what we communicated in January remains the same. We anticipate margin growth over the next three quarters, deposits should increase, and non-residential loans will continue to decline. All previously provided guidance remains unchanged. Now, I'll turn it over to Tom for further details on the numbers before Leslie.

Okay, great. Thanks, Raj. So, first, we'll start off on deposits. As Raj mentioned, total deposits grew by $489 million for the quarter, non-brokered grew by $644 million, and DDA grew by $404 million. We're very excited about the DDA number. That's a big number. We feel like we have great momentum in growing the core operating business within the company. Particularly exciting about this quarter, and even beyond the $404 million number, is looking at where it came from and how broadly based it was across all geographies and all lines of business. Every team contributed to this, and there were no enormous numbers in terms of any one client or one piece of business that dramatically drove it. It was kind of everywhere, which is really good to see. As Raj mentioned, the new business pipeline from a deposit perspective on the treasury management side is really good, over $1 billion in near-term deposits. Particularly coming off of such a strong quarter, we were pleased to see that the leading indicators going into this quarter and the next quarter look really good in terms of the number of deals out there and the number of proposals, acceptances, and similar factors. So we felt really good about that.

Tom, if I may interject, one point that I'd like to make about this quarter's DDA growth is that it did happen in the third month of the quarter. So it happened more in March than in the first two months. What that means is, it didn't really benefit our margin this quarter as much as it should benefit going forward, just a detailed point.

On the loan side, overall loans were down $407 million quarter-over-quarter, with residential down $152 million, and C&I and CRE segments down a total of $226 million. As Raj mentioned, production was actually really good for the quarter. It was in line with what expectations were. We did have an unusually high number of line paydowns in certain segments, which impacted the quarter more than we originally expected to see. As we look forward into the rest of the year, particularly in all of the core C&I segments, corporate banking, commercial banking, and small business, the pipelines are really robust as we come into the second, third, and fourth quarters. So, we continue to feel good about loan growth overall for the year. Other businesses performed as we expected. Franchise equipment, municipal finance were down modestly. Mortgage warehouse did have a bit of an uptick this quarter. Overall, as we look forward, the pipelines for business look very good. I'll spend a few minutes on CRE, since that’s obviously of great interest to everybody. As we've talked in the past, our CRE exposure as a percentage of the total book in risk-based capital is modest. It's 24% of total loans. CRE to total risk-based capital is 166%. Just as a comparison, if you look at the 12/31/23 call report data, for banks in the $10 billion to $100 billion range, the average is 35% for the total portfolio and total CRE to risk-based capital of 225%. We're below where everyone is in the market predominantly. I'd also point out our construction loan book has always been relatively modest and is less than 10% of the total UPB within CRE. As of March 31, the weighted average LTV of the CRE portfolio was 57%, and the weighted average debt service coverage ratio was 1.83%. About 15% of the CRE portfolio matures in the next 12 months, and about 6% matures in 12 months and is fixed rate. Non-performing loans in the CRE portfolio, other than the guaranteed portion of SBA loans, are negligible. I want to turn to office for a little bit. We have a total office portfolio of $1.8 billion. Of that, about $300 million is medical office, so traditional office is about $1.5 billion, made up of 99 loans. I have all of them in front of me.

How much time do you have?

And we follow each one closely by individual loan and by market segment on a quarterly basis. So we're very familiar with the entire portfolio. The weighted average LTV of the office portfolio was 65%. The weighted average debt service coverage ratio was 1.7% at March 31. There are breakdowns in the supplemental deck on the office portfolio by geography that you can look at.

Our largest loan is only roughly $50 million.

Right. Our average loan in the book is actually about $18 million, and the vast majority of them range between $15 million and $25 million is the majority of the portfolio. 59% of the office portfolio is in Florida, where the demand and demographics continue to be generally favorable. Substantially all of the Florida portfolio is suburban. Our overall exposure to central business district-type towers is very modest. Of the 99 loans, we have about 12 that I would call downtown office tower buildings; the rest are all suburban-type properties, and again, substantially in Florida. There are some charts on Slide 15 that will give you further geographic breakdown of that. With respect to the New York Tri-State portfolio, again, not much difference, 43% is in Manhattan, with about $181 million of office in Manhattan, and 96% occupancy within that book, with a 12-month lease rollover of 4%. Rent rollover in the next 12 months is a small portion of the office portfolio, at about 10%. We have seen some increases that we've expected in criticized and classified office loans. I thought I'd provide you a sense of what those issues look like by pointing out a couple of situations. When we look at loans that are in that category, generally we see office buildings undergoing lease transitions. One, our largest criticized and classified loan happens to fit into this, where it's an office building in suburban Miami in a high-demand area where the actual occupancy today is 98%, but unfortunately, you have one large tenant that came in as a new tenant six or seven months ago, and the demand these days generally allows for credit tenants to get 12 months of concessionary lease payments. So you have a period where the actual occupancy of the building is 98%, but the economic occupancy is far less. We know when those lease payments will start. We have it on the calendar. We understand what the pro forma debt service coverage will look like once the lease payments do start. Regardless of who the tenant is, we don’t start counting cash flow until it’s paid, which is normally 90 days after the commencement of the lease payments. We have several buildings in a transitionary stage, where you have occupancy at around 90%, where you have pro formas that would be well above past loan policy guidelines, but they’re in a transition stage with new tenants. We also have loans where everyone is seeing market issues, vacancies, lease-ups going on, properties being subdivided, and it just takes time to work through this. In general, we think asset owners are supporting their assets by putting money into them and making investments in the properties. They have significant equity in them, and I think we'll be in a handful of these situations for a period as we navigate through this lease transition phase. I wanted to provide a little bit of anecdotal information that I thought would be helpful for understanding the dimension of the office book that we have. So hopefully, that was helpful. With that, I'll turn it over to Leslie.

Thank you, Tom. As Raj mentioned, net income for the quarter was $48 million, or $0.64 per share. The margin was 2.57% this quarter, down from 2.60% last quarter. The yield on loans increased from 5.69% to 5.78%, driven by portfolio transitions as new production is introduced at higher rates. However, the yield on securities fell from 5.73% to 5.59%, influenced by retrospective accounting adjustments in the fourth quarter that inflated that quarter's yield. The current figures reflect a more accurate run rate. The cost of deposits rose by 22 basis points from 2.96% to 3.18%, and as Raj noted, this seems to be stabilizing, which is encouraging for the margin going forward. The average cost of FHLB advances decreased to 4.18% this quarter from 4.58% last quarter, as we are reducing those higher-rate advances. We continue to expect NIM to expand for the full year 2024 compared to 2023, and we believe Q1 was the low point. I want to remind you that this guidance relies more on our ongoing efforts to transform and remix the balance sheet than on the Fed's actions. In response to some of your questions, we conducted a scenario analysis under the same balance sheet transition assumptions with no cuts in 2024, and it resulted in a one basis point increase in margin. Our margin's direction will be driven by our success in managing the balance sheet. This quarter, the provision was $15 million, and the ACL to loans ratio rose from 82 basis points to 90 basis points, while the ACL to non-performing loans ratio increased to 188% from 160%. The primary reason for this quarter's provision and the increase in the ACL was a rise in qualitative reserves, particularly related to the office portfolio. Another factor was risk rating migration, partially balanced by improvements in the economic forecast. Slide 17 in the deck illustrates the changes in the ACL. When I mention the commercial portfolio reserve, it includes all C&I, all CRE, franchise finance, and equipment finance, excluding mortgage warehouse and pinnacle, as those have distinct risk profiles. The commercial reserve stood at 1.42% as of March 31. The reserve for the office portfolio was at 2.26% on the same date, with much of that increase being qualitative due to risk-rating migration, as Tom mentioned earlier. Additionally, our total CRE reserve is currently about six times our lifetime historical loss rate, indicating a substantial reserve. There is not much new information regarding non-interest income and expenses. Raj mentioned the $5.2 million of additional FDIC special assessment this quarter, and we also experienced about $6.5 million in residual losses on lease equipment last quarter, compared to $2.7 million in residual gains this quarter, resulting in a change in the fee line. The ETR was slightly elevated this quarter due to a specific discrete item, but our guidance for future performance remains unchanged. I'll now hand it over to Raj for any final remarks, and then we can proceed to questions.

This is about as clean and as good a quarter as we could have hoped for 90 days ago. Very happy with where everything landed and looking forward to the rest of the year very optimistically. So, we will take Q&A now.

Thank you. Our first question comes from Benjamin Gerlinger with Citi. Your line is open.

Hey, good morning, everyone.

Good morning.

Hi, Ben.

I hate to belabor the point too much, but I was curious, can we just talk through the CRE provision increase? I know you talked through the qualitative overlay, and a lot of that is really, really helpful, but I'm just trying to square the circle. It sounds like things are good, but then you also did increase the reserve a healthy amount, so just kind of thinking about the dynamics associated with that. Are you expecting losses, or is it more CECL accounting? I'm just trying to square those two circles because things sound good, but then you also did increase the reserve.

Sure. You guys have been asking us to increase the reserve. No, I'm just kidding, that's not why we did it in case the SEC is listening. But no, I think, Ben, we don't expect any losses in our CRE portfolio to be very manageable. However, we recognize that the environment, particularly around office, is challenging, and we have seen some risk rating migration going on there. To come up with that qualitative reserve, we made some broad assumptions about potential changes in cap rates and how they might impact our portfolio. We do not expect a lot of loss content in this portfolio, but we do recognize the challenging environment, which is why we reserved qualitatively.

Yeah.

Ben, I want to add one thing, a general comment about risk rating migration. We take our risk rating and the intellectual honesty that goes into it very seriously. We do not play games with that. We call the risk as we see it. We don't try to be overly conservative or overly non-conservative. We try to be straightforward because risk ratings reflect our view of the loan's performance over time. If you try to bend those rules, you can lose credibility with stakeholders, including regulators and investors. We try to stay true to our risk ratings. When we see risk build up, we acknowledge it and adjust risk ratings. This is an important aspect of maintaining long-term credibility. During COVID, we also called out risk early and downgraded ratings when risk was evident, while we saw a lot of our peers not doing so. This situation requires that we acknowledge increased risks in office assets today compared to a few months ago, and we are proactively managing our reserves in response.

In response to Raj's comment about COVID, we downgraded loans, increased our reserves, and did not experience any lost content.

Yeah, that's helpful color. Appreciate it. And we can just kind of pivot here for the next one. I know that you guys are kind of baking in some growth, and I think you said higher loan balances are expected for the year-over-year. I'm just kind of curious about the cadence of that growth, where it might come from. It seems like the asset side of the balance sheet is going to be the driver of PPNR from this point forward, so I'm just trying to get a sense of where your exit margin might be based on that growth and kind of the pricing. I know Leslie touched on this earlier, but I'm curious if you could narrow it down considering rate cuts are probably minimal for your margin outlook.

Yeah, I would say similar to what we told you last quarter, we expect the margin to be in the high 2s by the end of the year. That guidance is unchanged from what we told you last quarter. We expect the residential portfolio to continue to amortize down at about the pace you've seen over the last four quarters, probably another $800 million for the year. We expect growth to come from our core middle-market commercial portfolio, primarily C&I, and possibly some CRE, but primarily C&I is where we expect double-digit growth in that segment. The segments that are now getting very small, like pinnacle and bridge, will likely not exhibit growth. Bridge will probably continue to wind down; pinnacle will remain somewhat steady due to pricing dynamics.

Okay, helpful. I appreciate that. I'll step back.

Thank you. And our next question coming from the line of Stephen Scouten with Piper Sandler. Your line is open.

Hey, good morning, everyone. Thanks for the time. I guess I was curious, you guys raised your dividend here this quarter. I was wondering if there are any updates on thoughts around share repurchase. Capital continues to build. You've been building the reserves, and it seems like at these levels you might be more apt to do a buyback. So I wonder if you have any updated thoughts there?

There is no update. We do continue to discuss it at each of our Board meetings. In the May Board meeting, we'll have another conversation. But I'm not expecting a buyback yet. We are changing our mix of our balance sheet. Remember, from a risk-weighted assets perspective, we are lowering low-risk-weighted assets, like residential loans, and replacing them with high-risk-weighted assets, C&I. So, capital will build up, but CET1 won't increase as much due to the change of mix of assets, which is necessary to improve margin. The Board has discussed buyback in February when we took action on dividends. We will review it in May, but I suspect buyback is more likely in the second half of the year. I doubt it will happen in May.

Okay, that's really helpful, Raj, thanks for that. I'm just kind of curious regarding the loan loss reserve, which went up 8 basis points, and you're incrementally more protected. If I look at that waterfall chart, I see the economic forecast component going down. Am I reading that right where you made some scenario weighting adjustments to take that number down, or what's the dynamics of that around the economic forecast?

Most of that is just that the forecast is better than it was three months ago.

Okay. So no changes to the way you rate scenarios.

We tweak that every quarter, but really we're just seeing better forecasts, and so the model results are coming out more favorably.

Got it. And then just the last thing for me, obviously, there’s great momentum on non-interest-bearing deposits. It sounds like Tom mentioned the pipelines were pretty good on the treasury side as well. I'm curious what you think you can do there. I know it's hard to predict through the full year. And then maybe an update on Dallas, in particular, on the progress you’ve seen and how much that contributes to the positive momentum.

It's too early for Dallas to contribute anything meaningful, so these numbers are not really because of Dallas. There's obviously some growth there, but it's small compared to the total number. But, Tom?

When we look at the markets that we're in, I would say this last quarter was a particularly good hiring timeframe for us. We added to the teams in Atlanta and Dallas, making some key hires in the corporate banking space in Dallas. It is too early for any major results to kick in yet. We are seeing good activity and good pipeline build. However, that is not predominantly driving the numbers in the $404 million of DDA growth. That was really more across existing geographies and lines of business.

Got it. Got it. And you think that progress can continue based on what you're seeing in the pipeline?

Yes.

Thank you.

Thank you. And our next question coming from the line of Jared Shaw with Barclays. Your line is open.

Hey, good morning, everybody.

Good morning.

Good morning, Jared.

Maybe just following up on the deposits and funding trends that we're seeing in DDA. Would you say you're also seeing continued remix from existing customers offset by new customers bringing money in, or do you feel like on an average account basis, we're sort of at the bottom for average DDAs?

It's a little hard to say. I think there is still some bleed happening with older relationships, which is why you’re seeing the $400 million or so in net growth. I think some of that is still happening. But we're trying to compensate by bringing in new business. So I think it's still a little bit of a leaky bucket. If that's what you're asking about.

Yeah.

I believe there’s still some of that happening. You do wonder like, you haven't woken up yet, but the leaky bucket phenomenon is still true. However, we have a lot of momentum on filling the bucket with new business based on the business that was closed this quarter and also what’s in the pipeline.

Okay. And then on the deposit beta, do you think we've seen the peak here? Even if we don't get rate cuts, should we expect to gradually see a decline either from that remix of DDAs or not having to pay off as much in market to retain some of those interest-bearing deposits?

I certainly hope so, or at least stability. Seeing the numbers from January, February, March, and into April, we're observing complete stability. It's been flat. I get a report every morning on what the deposit book looked like the night before, and it’s nice to see the far right column, which is the cost of funds looking pretty stable. So yes, it looks like we are stable. When will it start declining without the Fed moving? DDA keeps building up, the way we expect it to, and we think it will start declining as well. We have reached that inflection point, and it certainly feels better.

Okay. And finally for me on the office side, you talked about some of the rent concessions to attract new tenants. Have you been noticing landlords having to increase either the rate or pace of concessions to attract those new tenants? Also, what gives you confidence that the expected lower occupancy levels are temporary? Is it just insight into the pipeline for those landlords?

I don't think the concession period has expanded significantly in most of the markets we’re in. If you're in markets like San Francisco or Chicago, you might see some changes there. However, in better growth markets, we're generally seeing a standard 12-month period of concessions without any major changes. The confidence we have comes from the underlying demographics in the market. If you look at markets where we have significant office exposure, like Florida, for instance, the population and business growth trends are very strong. We’re seeing growth across all related industry segments within Florida, which gives us confidence in leasing activity.

In Manhattan, for example, the rent rollover in the next 12 months is only 4%.

Overall, New York City recently led the country in generating new tech jobs, and while we don’t possess many buildings in New York, we’ve noted strong activity in the tech-related return to office sector, which supports the positive outlook for those buildings. So generally, I think the markets we're in are justifying our confidence around business activity leading to leasing activity.

Tom really is sitting here with a detailed overview of every loan in the office portfolio. The level of monitoring and insight we have into that portfolio gives us confidence. We know precisely what's going on with each property.

Portfolio management has reached a different level.

Our teams are consistently visiting these properties, talking to the asset owners and leasing agents. They possess a granular level of knowledge regarding each property.

Great. Thanks very much.

Thank you. Our next question comes from the line of Woody Lay with KBW. Your line is open.

Hey, good morning, guys.

Good morning.

Good morning, Woody.

Just one follow-up on the non-interest-bearing deposits. As you mentioned, it looks like it all came on in the final month of the quarter. All those deposits should be sticky. There are no seasonal factors there.

No. There are seasonal trends in certain businesses we serve. There are monthly trends and seasonal trends, but a lot of that growth was new business. Some of it was certainly seasonal as well. We experienced a typical decline in DDA last quarter, as always happens in December, and we are now seeing that build-up. That build-up is not occurring during a high season. It will continue to happen. We expect the seasonal changes to keep helping as we enter summer. There isn't any lumpiness here that I’m worried about that will come and go from one quarter to the next.

Got it. I wanted to shift over. I think in the release you mentioned you saw some shared national credit runoff. I was just wondering if you could quantify that on a dollar basis and do you think that's a trend that continues from here?

I don't have those numbers in front of me right now, Woody. I'll let Tom speak to expectations around that.

When it comes to the shared national credit segment, we consistently look forward to identify risk areas in the economy. When we make decisions to exit specific credits, those decisions involve segments where we are less optimistic about future trends. Typically, those decisions are somewhat episodic based on our industry outlook rather than a fixed strategy. Our long-term strategy remains focused on building bilateral business with operating accounts and treasury management.

Did those credits that were exited have any deposit relationships with the bank? Does the majority of your national credit portfolio have a full banking relationship?

The credits we exited did not have depository relationships. Our shared national credit portfolio breaks down into different categories. For shared national credits we lead, we maintain the depository relationship. In some credits, we may not be the lead bank, but we still serve as the depository agent for the relationship. In others, where we’re neither the lead nor the depository bank, we generally prefer to de-emphasize those relationships moving forward.

Got it. That’s helpful commentary. That's all from me. Thanks, guys.

Thank you. And our next question coming from the line of Steven Alexopoulos with J.P. Morgan. Your line is open.

Hey, good morning, everybody.

Good morning.

Good morning, Steve.

I know you've had a bunch of questions on office CRE, but I had a bigger picture question for you guys. When investors or analysts ask larger banks about their outlook and risk, the response often indicates that regional banks are holding the risk on office CRE. I didn't really hear that in your responses, and you’re working through some of these challenges. Do you guys agree with that? Are regional banks indeed holding more risk than larger banks? Or do you feel you're an exception with your peer group, and your situation reflects typical conditions?

I will start, and Tom, you can chime in. First, I would agree regionally that banks tend to have more CRE exposure than the Top 10 banks, and looking at CRE to risk-based capital ratios, smaller and community banks have more exposure. However, I start to disagree from here. Different banks have different types of CRE portfolios. For example, one regional bank may have average ticket sizes of $1.5 million, while another may have $15 million to $18 million loans as we do. Larger regional banks may also have very large exposures, leading to diverse risk profiles. Broadly stating that all regional banks face the same risks as a result of their CRE exposure oversimplifies the complexity. We certainly know our book best, and we have lower CRE exposure than typical banks our size. Our financing is generally between $15 million and $18 million appraised ticket sizes. We also pursue conservative lending strategies, ensuring asset allocation throughout our portfolio. Some of our CRE exposure does lean towards commercial rather than construction, which tends to carry greater risk. In fact, only about 8% of the overall portfolio is dedicated to construction loans.

When looking at our overall CRE exposure, we find that we’re clearly positioned at the lower end compared to other banks in the $10 billion to $100 billion range. We have maintained strong discipline around diversification within that book, where no single asset exceeds 25% of our entire unconventional shrinkage. We allocate our assets carefully and impose project limits. Overall, our portfolio across all asset classes remains robust, and we forego higher-risk elements that come into play during cycles—particularly high-risk construction loans.

The disparities between CBD and suburban risks are significant, and paying attention to that provides greater insight. Banks with the same exposure but differing asset types and markets can reveal vastly different risk profiles. Understanding this provides greater perspective.

Examining this dimensionality down to submarkets, our teams analyze portfolio performance with an eye not just toward aggregate amounts but also geographic performance. Our findings allow for more strategic discussions and risk assessments community banks need during economic cycles.

Got it. All other questions have been answered. Thanks for that detailed response.

Thank you.

Thank you. Our next question coming from the line of David Bishop with Hovde Group. Your line is open.

Yeah. Good morning, everyone.

Good morning.

Hey, Leslie, quick question. I think you mentioned that there were some payoffs or repricing on the CD book this quarter. Just curious what that looked like and how repricing will come about over the next quarter or two on that book, along with the current average rate?

We had about $900 million or so repriced in the first quarter, somewhere between 30 to 50 basis points. Going forward, we expect that to be regular and spread out, so I think we’re past the cliff. You can see the effect on the change in the cost of funds for the quarter.

Got it. I know there was some noise in fee income last quarter. Do you determine whether this first-quarter rate represents a decent run rate or good approximation heading into the rest of the year?

For the most part, yes. These leasing residual items will be sporadic and episodic, as the portfolio is small enough that such occurrences do not follow a regular pattern. You’ve seen some of that over the last several quarters, and while those will be sporadic, otherwise—the answer is yes, you can expect good performance overall.

Perfect. Most of my questions have been asked and answered. Thank you.

Thank you.

Thank you. I see no further questions in the queue at this time. I will now turn the call back over to Mr. Raj Singh for any closing remarks.

Thank you, everyone, for joining us. We will speak to you again in three months. In the meantime, you know how to reach us. Thanks, bye.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.