Earnings Call Transcript - BKU Q1 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the BankUnited Inc. First Quarter 2022 Earnings Call. At this time, all participant lines are in listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised, today's conference may be recorded. I’d now like to hand the conference to your host today, Susan Greenfield, Corporate Secretary. Please go ahead.

Susan Greenfield, Corporate Secretary

Thank you, Liz. Good morning, and thank you for joining us today on our first quarter 2022 earnings 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, or on the company's current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including, without limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by external circumstances outside the company’s direct control. The company does not undertake any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2021, and any subsequent quarterly reports 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.

Rajinder Singh, Chairman, President and CEO

Thank you, Susan. Welcome, everyone. Thank you for joining us for our earnings call. Let me start with some comments about the economy and our markets that we are in, and generally how we see the outlook for things that we don't control but impact our business. The Main Street view, which is what we get from talking to our clients day in and day out, is actually very healthy. We are seeing a robust economy in Florida, have been for quite some time, and even New York has improved quite a bit over the last couple of quarters. So, we have nothing really to complain about on the economic front. Growth is strong. Personal and business balance sheets are strong and healthy. Of course, the usual issues with labor constraints and inflation are nothing new, but overall, home prices are up. Residential markets are robust. So, the main street view at this time is very healthy and strong. Then there's the other view, which is the capital markets view, which we get by looking at our Bloomberg screens all day long these days, is that this was a very volatile quarter, probably the most volatile quarter in quite some time. Especially in fixed income, we saw the yield curve go up to where it is, but we also saw spread widening across the board in fixed income assets. That gives us a little pause when we think about sort of the medium to long-term as in maybe next year that there may be a slowdown. Again, that can change, and we'll keep monitoring it, but those are the sorts of inputs we're taking into account as we think about executing the strategy. Quickly getting into the financial results for the quarter, earnings came in at about $670.2 million or $0.79 per share. NIM expanded. I think last quarter we were 2.44. This quarter, we came in at 2.50. Just for comparison, last quarter I know there was a lot of noise in the numbers, but if you compare it to the first quarter of last year, we were at 2.39. Cost of deposits came down again to 17 basis points for the quarter. I think we ended the quarter for spot balances; the deposit pricing was around 16 basis points. I think this is the bottom in terms of deposit pricing, to state the obvious. The Fed is going to raise rates fairly aggressively from what everyone is talking about. It looks like this quarter, there will probably be a 100 basis points increase between the May and June meetings. So, I think deposit pricing will start to rise from here on, but it's nice that we were able to work it down to 16, 17 basis points. If you remember, last time the Fed reduced rates - started raising rates in the last cycle, our cost of funds bottomed out in the 50-55 basis point range. So, we’re very happy with what we've been able to achieve with our deposit franchise. By the way, we also had $688 million of DDA growth this quarter. So, that momentum continues. Total deposits did shrink. That was a deliberate effort, which started last quarter, fourth quarter, and mostly done in this quarter. We deliberately shrank our deposits in interest rates and deposits, but the DDA and the DDA growth that we got, the $688 million, was pretty widespread. It came from all parts of the company. It came from all geographies that we do business in, so it wasn’t concentrated in any one area. And even before I get the question about how much of this was core or wasn't, I'd say a vast majority of it was core. There's probably a couple of hundred million that would fall into the category of just money moving around at the end of the quarter. So outside of that, everything was core deposit growth. Average loans increased $586 million, but end of period loans declined $227 million. The biggest driver in that decline is the mortgage warehouse business, which came down roughly $400 million, returning to its normal seasonal trend. Utilization dipped into the 30s, which is what happens in March. The last couple of years, due to the pandemic, have been sort of outlier years, but now we see that business returning to its normal cadence, which is March being the slowest time in terms of utilization. Then it starts to build from here into June and generally into the third quarter before starting to slow down in the fourth quarter again. So we’re seeing that return. Our other businesses are also seasonal. First quarter is always our slowest quarter, even outside of the mortgage warehouse business. In terms of pipelines, we’re pretty excited about what we're seeing in our pipeline, both C&I and CRE. I think this will be the year CRE will grow. We’ve been shrinking CRE for many years, but now we see momentum in that and look forward to it optimistically. Just taking a 12-month view, which I often say you should always look at on a 12-month rolling basis instead of focusing on any one quarter. So, over the last 12 months, NIDDA, non-interest DDA, grew $1.7 billion. Our total deposits grew about $809 million, excluding loans, excluding PPP, which grew $841 million. So, loan growth and deposit growth are roughly in line, and DDA was really the big story. Credit really quick, nothing but good news here. Again, as expected, but nevertheless, good to see the numbers. NPLs declined from 87 basis points to 65 basis points. By the way, if you carve out the guaranteed portion of the SBA loans, the NPL stood at 47 basis points. Criticized classifieds, which have been declining steadily every quarter, that trend continued. It came down by another $280 million, which we were satisfied with. The annualized net charge-off rate came in at 15 basis points. Just to put it in context, last year for the full year, we were at about 29 basis points. Our buyback program had us buying back $82 million of stock in the first quarter. You already know that we increased our dividend by $0.02 to $0.25 a share. I expect that we will burn through this entire buyback authorization sometime in the second quarter. When we do, we will go back and talk to our board, and I expect there will be another authorization coming shortly after that. In terms of the guidance on loans, deposits, expenses, and margins, we stand by all the guidance we gave you. We are feeling good about what 2022 is shaping up to be. Putting aside the numbers, just a couple of updates. We returned to the office in the first week of March. We are in the new normal now. After many false starts with the virus and what have you, we eventually are back to the new normal. It has gone well, excluding the fact that Tom, Leslie, and I all got COVID very quickly after returning to the office. Other than that, everything has gone just fine. We're healthy. I’ve talked a lot about the vision of the company and what we’re trying to build long-term, which is a relationship-based middle-market small business bank. Our most important currency is trust. This is something that makes me really proud. Newsweek announced they ranked all the banks in the country on a trust factor and we were ranked as the fourth most trusted bank in the country. We’re very proud of this achievement, and we're celebrating it at the company. Quickly on Atlanta and Texas expansion: We have hired the head of the C&I business, the head of the CRE business, and our head of healthcare practice, which is already in Atlanta. That bench strength is getting in place. We are moving into our offices within the next week or so. Same thing in Atlanta. We received approval for our branch just a couple of days ago and we expect to open the doors next week. The team is hired, trained, and ready to go. All good news and progress over there. In fact, in Atlanta, we've already booked our first piece of business, a marquee name on the C&I front. We did that loan just a couple of weeks back. So, with that, let me turn it over to Tom for a little deeper dive into the numbers.

Tom Cornish, Chief Operating Officer

Thank you very much, Raj. To follow up on Raj’s comments on Atlanta and the Dallas expansion, we have a number of other strategic initiatives for the year, and we've made some key hires. We've brought in a sponsor finance leader in our New York market, focusing on the sponsor finance business. We’ve not had a dedicated effort in the sponsor finance area previously, which we’re excited about. We've also recently hired a new trade finance and supply chain finance leader in the Miami market. Florida, New York, and the Southeast are great export markets for us, which makes us optimistic. As Raj mentioned, New York is on the move and we have hired a middle market banking leader for the Long Island market. We're pleased with what's happening in middle market banking in Long Island as it provides us with a great opportunity to increase our portfolio and client base in that market. On a high note, we’ve seen strong new business acquisition with new logos, which has bled through into transactional revenue business. Our service charge revenue was up year-over-year for the first quarter by about 22%. This strategy of new relationships, expanding and winning singles and doubles in key relationships every quarter, is vital to our overall strategy. Covering deposits and loans just a little bit more, as Raj mentioned, total deposits declined by $897 million. Most of that runoff was in what we believed to be interest rate-sensitive accounts, broker deposits, and interest-bearing accounts that are higher on the beta side. We've been working over the last few quarters in anticipation of the interest rate rises we expect and moving out of some of this activity. Some of it happened in the fourth quarter, while some got delayed into the first quarter of 2022. Our strategy continues to focus on solid NIDDA growth. Overall growth of $688 million, as Raj mentioned, is strong. On the loan side, we saw average loans increase by $586 million for the quarter, although they were down $227 million, predominantly due to the large decline in the mortgage warehouse business that Raj explained. Residential loans grew by $244 million. I’d point out that the C&I book grew by $122 million in balances for the quarter and increased $345 million in total commitments. This growth was broad throughout corporate and commercial banking as well as our small business segment across various industry segments. We feel really good about C&I growth for the rest of the year, and we expect growth in the CRE segment as well. We're particularly seeing good growth in CRE in the New York market. We're very optimistic about many transactions we believe are near-term transactions in the New York CRE market. Now I’ll turn it over to Leslie for more details on the quarter.

Rajinder Singh, Chairman, President and CEO

Actually, Leslie, let me just interrupt to add a little thing. We did see a fair amount of dislocation in the fixed income market, and we were opportunistic, especially in the month of March. We stepped in and deviated from what was our original plan. The original plan was not to grow the bond portfolio this quarter. In fact, the plan was to shrink it, but we looked opportunistically and saw spreads at really amazing width. So, we decided to grow the bond portfolio towards the end of the quarter. You won't see the impact of that in the P&L this quarter; you will next quarter. That's just an explanation for why the bond portfolio grew, it was purely opportunistic. Nothing else.

Leslie Lunak, Chief Financial Officer

Thanks, Raj. A couple of highlights from the quarter, with more detail around the numbers. The NIM increased this quarter to 2.50 from 2.44 last quarter. The yield on investment securities increased to 173 from 154. The duration of this portfolio is short. We're already starting to see the impact of rising rates and widening spreads on the portfolio yield as new purchases come on at higher spreads. Slowing speeds on premium securities also positively impacted the yield on securities for the quarter by about eight basis points. We saw the yield on loans decline to 336 this quarter from 350 last quarter. I wouldn't say any one single factor drove that, but generally, for most of Q4 and Q1 of 2022, loans that were coming on were at a slightly lower yield than loans that were running off the portfolio. We didn't see this move in rates until late in Q1, and we did start to see an inflection point towards the end of March in terms of the yield of new loans. So, we should start to see this go the other way as we move through 2022. The total cost of deposits declined by two basis points quarter-over-quarter and the cost of interest-bearing deposits declined by three basis points. We've locked in some term deposits in anticipation of rising rates. We have issued callable CDs and some brokerage CDs, and put some cash flow hedges against the deposit book. Excluding those instruments, the cost of interest-bearing deposits would have been about three basis points lower for the quarter. The cost of FHLB advances declined to 111 from 186, mainly due to the runoff and termination of borrowings and related hedges at higher rates and the addition of new advances at lower prevailing rates. We still expect double-digit growth in net interest income for the year and further expansion in the NIM over the course of the year, probably most concentrated in the back half of the year as we really see the impact of rising rates on our loan portfolio. The extent to which we see the NIM expand will depend in part on competition around deposit pricing. Moving to the ACL and the provision, the provision for credit losses for the quarter was $7.8 million, mainly driven by a qualitative overlay related to economic uncertainty around some of the factors Raj discussed at the beginning of the call. The reserve remained consistent as a percentage of loans, 54 basis points at March 31, compared to 53 basis points at December 31, 2021. Factors impacting the reserve for the first quarter include a $12.8 million increase in qualitative overlays related to economic uncertainty, particularly around inflationary concerns and the impact of the Fed’s actions, rising rates, quantitative tightening, and some lingering uncertainty around the pandemic. The economic forecast partially offset that, driving a $4.9 million decrease in the reserve, along with an increase of $5.6 million related to updated assumptions. We took net charge-offs for the quarter of $8.5 million. Slides 20 through 22 in the supplemental deck provide more information about criticized and classified assets and risk rating migration. Criticized and classified commercial loans declined by $280 million this quarter, with total non-performing loans decreasing by $55 million to $151 million. This includes $42 million of the guaranteed portion of SBA loans on non-accrual. I want to discuss the mark on the bond portfolio. It was a volatile fixed income market quarter. Unrealized losses on our available-for-sale securities totaled $235 million at 3/31 pre-tax. The after-tax impact on AOCI of that was $174 million. Portfolio segments with the largest impact were RMBS, CMBS, and agencies. All these unrealized losses are attributable to increasing rates and widening spreads linked to the Fed's actions and expectations about further quantitative tightening. They’re temporary in nature, not indicative of credit concerns, and we are not concerned about this at all. Thoughts on moving securities to held to maturity: moving a security to held to maturity doesn’t change the economics or risk profile associated with holding the security; it simply eliminates flexibility in managing our bond portfolio. We’ve opted not to do that. The silver lining is that we purchased securities at very attractive spreads towards the end of March, and we're already seeing that reflected in the increase in yield on securities this quarter. In the first quarter, we also took a negative mark through the P&L of $10.5 million on some preferred stock investments we hold at the holding company, also attributable to rising interest rates. The majority of the securities in that portfolio are still at a gain position compared to their original purchase price, and when this turns around, the positive mark will also run through earnings as these are equity securities. Additionally, driven by our changes in the treasury management area, we saw a 22% growth in deposit service charge revenue year-over-year compared to the first quarter of 2021. The decline in that other non-interest income line relates to episodic events and lower BOLI revenue. On the non-interest expense front, compensation expenses declined by $3.5 million for the quarter, primarily due to a special employee bonus paid in Q4 of 2021 of $6.8 million, partially offset by elevated employee benefits in the first quarter. From a comp standpoint, Q1 is likely a decent run rate for comp for the rest of the year, as we’ll see the full impact of merit increases and planned staff additions in future quarters. That’s all I have. I’ll turn it over to Raj for closing comments.

Rajinder Singh, Chairman, President and CEO

Thanks, Leslie. Let's just open it up for questions.

Operator, Operator

Our first question comes from Brady Gailey with KBW.

Will Jones, Analyst

Hey, good morning. This is Will Jones on for Brady. How are you, guys?

Leslie Lunak, Chief Financial Officer

Hey, good, Will. How are you?

Will Jones, Analyst

Hey, great. I wanted to start with the buyback. You were obviously very active again this quarter. Raj, Leslie, you've been very active in Q3 and Q4. Raj, your comments seem to indicate that there's not going to be any slowdown on the buyback. Could we still expect the buybacks to be at similar magnitudes as in prior quarters? And I wanted to get your thoughts on your excess capital position and whether there are any limiting factors in there.

Rajinder Singh, Chairman, President and CEO

Yes. In the short to medium term, I don't think there's anything there. In the long-term, you always have to look at growth prospects, the economy, and several other factors. But in the short-term, I don’t see much changing. That's why I say we'll get through the current buyback authorization in the next few weeks. We expect to go back to the board for another $150 million. You know we get authorizations in increments of $150 million at a time. We don't do a big one; this gives the board a chance to reassess the situation. I fully expect, I think we have a board meeting in the middle of May, possibly at that meeting, or shortly thereafter, we’ll be asking for another authorization.

Will Jones, Analyst

Okay. Could you remind us how much you have left on your current authorization?

Leslie Lunak, Chief Financial Officer

I can find it in just a minute.

Will Jones, Analyst

Yes, no worries. We can circle back if needed.

Leslie Lunak, Chief Financial Officer

I'll find it. Carry on. I’ll throw it out there when I find it.

Will Jones, Analyst

Great. Thank you so much. Thinking bigger picture, I know we haven't touched on BankUnited 2.0 in a while. I think as of early last year, you'd already achieved the $40 million of cost savings and were working on the $20 million of revenue synergies. Could you provide an update on where that stands today, or if that's already played out? As you think longer term, or maybe more intermediate term, growth is picking up. You're having a nice portfolio shift, rates are moving higher, and we're just in an environment to see some positive operating leverage. Have you discussed internal profitability targets? Do you think that something like a 1% ROE could be plausible in the near term?

Rajinder Singh, Chairman, President and CEO

Yes, the near-term goal is to hit 1% ROE, and double-digit ROE on a consistent basis. We hit that from time to time but aim for consistency above that. A lot depends on what happens; margin is going to expand. How much exactly? Time will tell. But margin will expand. We're not betting everything on rates going up, but we are slightly asset-sensitive. The last two years of this pandemic didn’t do permanent damage to the balance sheet for us or for most banks, but the opportunity cost of not having grown our C&I business and improving our asset mix is key. Now that the pandemic feels mostly behind us, it is time to reclaim those lost 18 months of C&I growth and CRE growth and actually execute on that to build margin, revenue, and profitability.

Leslie Lunak, Chief Financial Officer

Yes. Raj, just to interject, at the end of the quarter, there was $94 million left in the buyback authorization.

Rajinder Singh, Chairman, President and CEO

Yes.

Leslie Lunak, Chief Financial Officer

Well, there’s your answer.

Will Jones, Analyst

Hey, great. All very helpful. Thank you so much.

Operator, Operator

Our next question comes from Ben Gerlinger with Hovde Group.

Ben Gerlinger, Analyst

Hey, good morning, everyone. I'm curious about your expansion into Atlanta and then soon Texas. Raj mentioned that you've actually booked your first loan in Atlanta. Do you have any intermediate goals? What could Atlanta's impact be on broader BankUnited? Are there any loan portfolio metrics you would like to see or have a balance by the end of three years?

Rajinder Singh, Chairman, President and CEO

Yes. Ben, we have internal plans and targets for the team that's been hired, and their incentives are tied to that. They do have targets, but we have not disclosed them. For businesses we've started, we haven’t disclosed exactly what we're targeting in the short, medium, or long term. I will say this much, if you look back at any business we've started, we’ve never come out and said we’d do hundreds of millions of dollars right off the bat. I don’t think that's prudent. In the first year of these initiatives, they won’t move the needle for the company. They're small and won't change much. But over two, three, four years, they become a very important part. Look at Orlando, Jackson, and our mortgage warehouses; these things usually start slow, but once we get through an audit and exam cycle, we gain the confidence to shift into a higher gear. I would expect more growth next year than this year. Regarding Texas, that will be primarily a deposit play in the short term and not a loan play. Atlanta is both, so it’s a full-service approach. I don’t want to provide numbers; we have them internally, especially for the team we brought on, but they won’t move the needle in 2022.

Ben Gerlinger, Analyst

Got you. Okay. Leslie, could we take a minute to talk about the margin? The forward curve suggests 50 basis point increases over the next three Fed meetings. When considering the margin today, is it fair to say that the gain we just saw linked quarter is something we can expect over the next couple of quarters, or is this outside improvement?

Leslie Lunak, Chief Financial Officer

Over the rest of the year, I feel more confident now than I did when we spoke last about margin expansion. I don't know that the second quarter will see as much margin expansion as the first quarter. I don't think about this on a quarter-by-quarter basis; I think we’ll see good expansion throughout 2022. You might see more of the impact in the back half as commercial loans get added to the balance sheet at higher spreads and begin to impact the margin, but I expect further expansion for the rest of the year.

Ben Gerlinger, Analyst

Got you. Okay. That’s fair. One last question about expenses. Historically, Q1 has been a high-water mark, and you provided guidance around looming wage inflation. I think that was prudent. When you consider additional hires, is that baked into previous guidance?

Leslie Lunak, Chief Financial Officer

Yes. We still feel confident in the mid to high single-digit guidance we gave for non-interest expense in January.

Ben Gerlinger, Analyst

Got you. I appreciate it. Thanks, guys.

Operator, Operator

Our next question comes from Brock Vandervliet with UBS.

Brock Vandervliet, Analyst

Good morning. Thanks for the question. Raj, I wanted to revisit your comment on the warehouse. TCBI guided down about 30% for the year. What gives you confidence specifically that we’ll see a seasonal uptick in the second and third quarters?

Rajinder Singh, Chairman, President and CEO

The mortgage origination business is now almost entirely a purchase business. There’s no refi. The refi business was almost entirely flushed out of the system about four months ago when rates started to rise. The purchase business is still pretty decent. Of course, if rates continue to rise, the purchase market may be impacted as well. If they stabilize, around 5% mortgage rates, which seems high compared to December, it’s still manageable in terms of the purchase market. For us, mortgage warehouse is one of many spigots for lending. On a $35 billion sheet, it’s $700 million in outstanding. While this is crucial for that team, even minor fluctuations won’t drastically impact the numbers since it’s just a part of our overall lending. If I'm off a little here or there, it won’t be a significant loss. I’m observing utilization as normal when I compare March utilization year-over-year since the beginning. The last two years were exceptions. Historically by March, we’ve been in the 30-40% range; this March appears to have returned to that normalcy. Even if it doesn’t return entirely, at 40% or 45%, it’s not a massive business for us.

Leslie Lunak, Chief Financial Officer

And I’d also emphasize Raj’s point that our commitment level remains strong, so we expect our commitments will increase in the second quarter. We’re well-positioned in the relationships we're in. Sometimes in this business, clients consolidate lines; however, we're not seeing that in our client base.

Brock Vandervliet, Analyst

Okay. And as a follow-up regarding loan side, with C&I utilization increasing later in the year, what should we think about total loan growth?

Rajinder Singh, Chairman, President and CEO

Yes. Outside of the warehouse business, C&I utilization levels are slowly improving. Over the last six months, we've seen a steady increase every month. Utilization is still far from normal. Rather, it’s about halfway to normal compared to where it was at the beginning of last year. Improvement is likely, but is hard to predict as it’s tied to supply chain disruptions. I hesitate to say it will return to normal by year-end, but I believe we will see improvement.

Leslie Lunak, Chief Financial Officer

We guided in January to mid to high single digits for total loan growth this year ex-PPP, which has become pretty irrelevant now, but we haven’t changed that guidance.

Brock Vandervliet, Analyst

Okay, great. Excellent. Thanks for the questions.

Operator, Operator

Our next question comes from Jared Shaw with Wells Fargo.

Jared Shaw, Analyst

Hey, good morning. Looking at the commercial real estate segment, do you think we’ve hit the inflection point and should we expect to see some growth return to CRE?

Rajinder Singh, Chairman, President and CEO

Yes.

Leslie Lunak, Chief Financial Officer

We expect this to be a growth year for CRE, our first growth year since 2017. We’re quite excited about that, having spent many years running down the multifamily portfolio in New York.

Jared Shaw, Analyst

Will any of that be New York City or New York City multifamily, or is it more widespread?

Rajinder Singh, Chairman, President and CEO

It’s in New York City multifamily but not as it was in the past. It will be much more widespread. It’s not retail or CBD office. It encompasses multifamily in various areas, industrial, warehouse, and some medical office space. There’s even some retail, but only on an exception basis. I can't point to one specific asset class. Yes, there’ll be some New York multifamily, but not much.

Tom Cornish, Chief Operating Officer

When you look at the differences in the portfolio, the level of sponsors returning to the market in the last six to eight months reflects what we're seeing in our pipelines. They are serious long-term investors and sponsors, contrasting with last year’s short-term bottom fishers. We're very pleased with the quality of what we're seeing.

Jared Shaw, Analyst

Okay, that's good color. Thanks. Looking at funding and deposits, what are your expectations for deposit changes as we move forward? Your loan to deposit ratio is still much lower than historical levels. Should we continue to see deposit migration and use FHLB to fill in where needed?

Rajinder Singh, Chairman, President and CEO

We’re not letting up on our DDA growth effort. We want to keep bringing in new business and we've had great successes. However, as rates rise and eventually ECRs increase, there will be a slight headwind on DDA growth, not due to new business but due to commercial customers retaining fewer balances to avoid fees. There’s strong demand in onboarding new clients, which is a good problem to have. In terms of overall deposits, we project little to no growth since we desire to balance things out. We have significantly more deposits than loans. The increased deposits, while we're modeling results, will differ significantly from past cycles. This time, the mantra is higher, faster. The Fed is likely to increase rates much quicker than last time. We need to be cautious in a fast-moving market and predict deposit flows accurately. Overall, we're focused on DDA growth as it builds long-term profitability and franchise value.

Jared Shaw, Analyst

When you say little to no growth outside of DDA, do you mean little to no growth in total balance?

Rajinder Singh, Chairman, President and CEO

Yes.

Leslie Lunak, Chief Financial Officer

That's for total deposits. Correct, Jared.

Jared Shaw, Analyst

So DDA will still grow; other balances will decline, resulting in a relatively unchanged total?

Leslie Lunak, Chief Financial Officer

That’s our goal. As for FHLB, we’re comfortable with wholesale funding on our balance sheet and the loan to deposit ratios. That quarter's growth in FHLB advances was really due to us being opportunistic and taking advantage of some opportunities in the bond market to acquire higher spread assets. We initially thought the bond portfolio would decrease but ended up growing by $700 million. That's your $1 billion increase in wholesale funding.

Jared Shaw, Analyst

And when you mention the $10.5 million charge regarding securities gains, what does that reflect?

Leslie Lunak, Chief Financial Officer

We didn’t sell anything. That was a mark on some preferred stocks we hold at the holding company, attributable to rising interest rates. Many securities in that portfolio are still at a gain position compared to their purchase price. When things turn around, the mark will also run through earnings as these are equity securities. We always have a bit of sales every quarter that are managerial in nature.

Jared Shaw, Analyst

Can you provide balances for what you sold?

Leslie Lunak, Chief Financial Officer

I don’t have those details in front of me. But for the purchases, let me check. The yield for what we purchased this quarter was in the mid-twos, and what we sold was in the mid-ones. This indicates that towards and for the quarter, we were buying in the mid-threes.

Jared Shaw, Analyst

Thanks; we’ll wait for the cash flow statement.

Leslie Lunak, Chief Financial Officer

Yes.

Matthew Breese, Analyst

Good morning. I wanted to revisit the mortgage discussion, but regarding gain on sale. I apologize if I missed it earlier, but what caused the gain on sale item to be negative this quarter?

Leslie Lunak, Chief Financial Officer

We don't have a mortgage origination and sale business. This negatively relates to the sale of our Ginnie Mae EBO portfolio. We experienced a timing issue with the loan modifications due to the rapid move in rates at the end of the quarter. Some loans modified at lower rates were modified and then sold at a loss. Loans currently being modified are at much higher rates. Nonetheless, the total yield on that EBO portfolio for the first quarter, including interest yield and net loss, remained over 4%. We’re satisfied with that.

Matthew Breese, Analyst

Got it. Could you also share your forecasts around deposit betas and loan betas over the next 12 months?

Leslie Lunak, Chief Financial Officer

We project deposit betas to be significantly lower than the previous rising rate cycle. I hesitate to provide exact numbers, as they are assumption-driven, and our deposit book is different from previous cycles. We’re confident, though, that betas will be lower on the deposit side.

Matthew Breese, Analyst

Have you increased pricing on any core offered rates?

Leslie Lunak, Chief Financial Officer

No, but that is coming. We haven't yet addressed it broadly.

Rajinder Singh, Chairman, President and CEO

It'll definitely happen this quarter considering we're anticipating a 100 basis point move. At least, there may be one or two instances with individual clients.

Matthew Breese, Analyst

Understood. The deposit insurance expense has been steadily declining. Where does it settle?

Leslie Lunak, Chief Financial Officer

Probably yes. I believe this is a decent run rate.

Matthew Breese, Analyst

You mentioned hiring a team in Long Island. Was that due to the disruptions from M&A in the city or more from established large bank employees?

Tom Cornish, Chief Operating Officer

The augmentations to our Long Island team came predominantly from larger bank long-term professionals who favor our environment, culture, and the flatness of our organization.

Rajinder Singh, Chairman, President and CEO

There’s been a fair amount of noise in the New York market due to the M&A activity. We have interviewed several candidates, more than usual, in recent weeks and months.

Matthew Breese, Analyst

Got it. Great, that’s all I had. Thanks for taking my questions.

Operator, Operator

Our next question comes from Chris Marinac with Janney Montgomery Scott.

Chris Marinac, Analyst

Thanks. Good morning. Matthew asked the same question I had regarding beta, so let me look at the bigger picture. Given rates, as Raj mentioned, the world's going to change in 90 days and probably a year. Do you believe the combination of higher interest rates and continued operating leverage will position BankUnited for stronger profitability?

Rajinder Singh, Chairman, President and CEO

The reason I have Leslie on the call is because she gets all the fun questions. So the high-level answer to your question is yes. I believe we will see continued margin expansion. While we’ll see increases in non-interest expense, I think revenue increase will outpace that. You’ll see operating leverage and an uptick in profitability. I’m not prognosticating for any specific quarter, but that’ll be the trend.

Chris Marinac, Analyst

I completely understand and appreciate that. I wanted to clarify that. Raj, you mentioned loan rates getting higher at the end of March. Should we anticipate your new onboarding loan rates remaining strong this quarter, and likely even stronger come July and August?

Rajinder Singh, Chairman, President and CEO

Yes. The best piece of news over the last three months has been the widening of spreads we’re witnessing. I believe the Fed stepping out of the market and allowing private sectors to operate has been encouraging. Although nobody enjoys seeing their bond portfolio marked down, I genuinely believe the business we’re doing now is healthier. Spreads have widened across the board, benefiting all asset classes. I hope this remains sustainable; it’s been about a month of wider spreads. The commercial business typically sees the news later, but it’s gaining traction, and if it keeps up, it’s favorable for us and other banks in the marketplace. The Fed stepping back was significant news this quarter, and I perceive it positively.

Chris Marinac, Analyst

Great, Raj, thank you very much, and thank you, Leslie, as well. I appreciate it.

Operator, Operator

That concludes today's Q&A session. I'd like to turn the call back to Mr. Singh for closing remarks.

Rajinder Singh, Chairman, President and CEO

Thank you very much. Thanks, everyone, for joining us. We'll see you again in 90 days, if not sooner. Thanks. Bye.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.