Earnings Call Transcript
BankUnited, Inc. (BKU)
Earnings Call Transcript - BKU Q2 2023
Operator, Operator
Good day, and thank you for standing by. Welcome to the BankUnited Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to our speaker today, Susan Greenfield. Please go ahead.
Susan Greenfield, Director of Investor Relations
Thank you, Latanya. Good morning and thank you for joining us today on our second quarter 2023 results conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries around the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including, without 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, such as adverse events in the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2022, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website, www.sec.gov. With that, I'd like to turn the call over to Raj.
Raj Singh, Chairman, President and CEO
Thank you, Susan. Welcome, everyone. Thank you for joining us. Ninety days ago, when we last spoke to you, I was just thinking of it this morning, the day before our last earnings release, Leslie, Tom, and I were huddled in a room and doing dry runs of what the earnings release would be like. I think we did two dry runs, which we've never done before, but we did those that day. We prepared ourselves with answers for every question that we could possibly be asked. The amount of data available to us was at our fingertips to address any inquiries. Compare that to yesterday when Tom and I were at a golf outing for our top clients. We had a great day but did leave Leslie back in the office, as she doesn't like golf. So, 90 days can make a significant difference. We're happy to have entertained our clients, and life has sort of returned to normal. The day of earnings last quarter or maybe the next day, I called a senior leadership team meeting with approximately the top 10 to 12 people in the company. We huddled together in a conference room for half a day and initiated a short-term strategy session, which is something we rarely do. We always talk about long-term strategy, but we acknowledged the tense environment we were in, and determined what actionable steps we could take in the short-term, defined as the next quarter or two, to enhance the standing of the company. It was a metrics-driven conversation where we wrote down actionable metrics like improving our loan-to-deposit ratio, total deposits, paying down FHLB borrowings, starting an expense management program, enhancing liquidity coverage, and improving our uninsured deposit levels. We put all those items on a whiteboard, studied them collectively for a while, and identified the most achievable goals in a matter of months or quarters. I'm pleased to say that, standing here exactly three months later and reporting our second quarter numbers, we've actually met pretty much all those metrics we laid out for ourselves. We've improved liquidity and capital, grown deposits, improved our loan deposit ratio, reduced our mortgage and securities books, and paid down FHLB. While margin did decrease this quarter, we stabilized it, which I'll discuss in further detail shortly. Overall, I'm quite happy with our progress in this brief period of time. Last quarter, I noted that the first quarter could be viewed as two very different timelines. The first timeline extended from January 1 to March 10, and the second from March 11 to the end of March. For this quarter, attempting a similar breakdown isn't as clear. However, I do feel the first half of the quarter felt markedly different from the second half. Going into July, that trend continued, and things feel fairly back to normal. I'd like to make some brief comments about the environment that we must navigate. Firstly, the economy is quite resilient. I'm tired of stating this repeatedly on every call, but that’s genuinely how we perceive it. We don't see any significant stresses manifesting in our geographies. Accordingly, the economy is strong, and Florida is performing twice as robustly as the national average. Unfortunately, this also means inflation in Florida is higher than the rest of the country. Concerning the rate environment, it seems likely that the Fed will enact another rate increase, as the market anticipates. However, based on where the CPI and PPI data stand, it seems we're nearing an inflection point in Fed policy, which is a positive development. Generally, the banking environment, though it has greatly improved from the chaos of three months ago, remains challenging, primarily due to the inverted yield curve and intense competition for deposits. There's still a future expectation of economic slowing that remains uncertain. Now, let me quickly go over some figures while Leslie and Tom will dive deeper into the details. Net income came in at $58 million, or $0.78 per share, right in line with consensus estimates. Deposits grew by $116 million. NIDDA fell by $62 million, but this represents a vast improvement over the significant declines we’ve witnessed in noninterest DDA in preceding quarters. Our non-interest DDA to total deposits ratio stood at 28.3%, relatively stable compared to March's figure of 28.6%. Total loans decreased by $263 million, predominantly in the residential sector, which we’ve been heavily involved in over the last several quarters, chiefly due to the pandemic. Thus, the reduction of that book was a deliberate decision on our part. Additionally, our securities portfolio also decreased, dropping by $390 million. On the liabilities side, we paid off $1.6 billion in FHLB advances. Our margin was $247 million for the quarter, a decrease from $262 million last quarter. However, I want to clarify that last quarter, our margin was declining sharply from both January to February and February to March, hence resulting in an overall figure of $262 million for that quarter. In contrast, we entered this quarter with a margin of $247 million and concluded it at $247 million. Thus, while this quarter’s margin decreased, it felt much better because it remained stable. I’m optimistic about that. The cost of deposits rose to $246 million this quarter, compared to $205 million last quarter, with an increase of 41 basis points. The previous quarter saw a more substantial increase of 63 basis points. Therefore, we observed a slight improvement in how rapidly deposits are repricing. On the credit front, there's not much to say since everything is stable. NPAs were 34 basis points, and excluding the SBA guaranteed loans, it was 24 basis points, a marginal increase of 2 basis points from last quarter. Charge-offs remained inline at 9 basis points, significantly better than the previous year's average of 22 basis points. Concerning the credit story, it’s reassuring that our office CRE levels are notably lower as compared to our peers, which I define as banks ranging from $10 billion to $100 billion. Last quarter, we provided substantial information about our office portfolio, and this quarter, we’ve included even more details. We're carefully scrutinizing each aspect of the book to ensure there aren't any emerging issues. There’s no significant concern present in our office portfolio. A significant portion of our exposure is located in Florida, and any exposure we have in New York City is of high quality. I can confidently assert that it’s challenging to identify issues within this portfolio. Regarding our capital position, I mentioned at the call's outset that we've also improved our capital stance, which wasn't a reactive move, but rather a proactive one; during uncertain times, having more capital is advantageous. Our CET1 improved, our tangible common equity ratio rose by 30 basis points, leading to an overall increase in tangible book value. Collectively, the pressures we faced three months ago have drastically subsided, which is positive. Our focus now returns to executing the long-term strategy we previously set for ourselves. I hope to come back in 90 days to share more progress on that front. Now, I’ll hand it over to Tom for further detail.
Tom Cornish, Chief Operating Officer
Great. Thank you, Raj. So first, on deposits, in aggregate, deposits were up $116 million for the quarter. NIDDA, as Raj mentioned, was down $62 million, non-maturity, interest-bearing deposits were down $92 million, while time deposits were up for the quarter by $270 million. The significant impact on deposits this quarter stemmed from a large government municipal portfolio, a seasonal component that contributed to a $378 million decline in that book, which we anticipated. This fluctuation is expected to vary alongside tax collections. Regarding new business, we have a solid line of sight into opportunities emerging from our treasury management operations and systems. We have approximately $1.6 billion in deposits corresponding to operating-type deposits within our treasury products that we expect to realize over the next couple of quarters. While timing may differ, especially in bilateral relationships and middle market scenarios, overall, the deposit book appears robust from a pipeline perspective. Our largest deposit vertical, as highlighted on slide eight of the deck, is in the Title Solutions business with total deposits reaching $2.7 billion as of June 30. This segment primarily consists of operating accounts, featuring over 700 accounts that grow by 30 to 40 accounts each quarter, and we are optimistic about this trend. As of June 30, no other industry vertical has deposits exceeding $1 billion. The loan-to-deposit ratio concluded the quarter at 95%, down from 97% as of March 31, and we aim to improve this ratio over time. In terms of the loan portfolio, as Raj indicated, the entirety was down $263 million during the quarter. I will break down my comments regarding core growth and the peripheral components seeing a decline, particularly residential loans. The CRE portfolio increased by $24 million for the quarter, while C&I decreased by $73 million, with Pinnacle up by $32 million. It’s anticipated that franchise financing and equipment financing will continue to decrease over the upcoming quarters. The core areas remain strong with robust pipelines expected over the next two quarters. Average rates on new production this quarter were approximately 8% for the C&I portfolio and about 7.6% for CRE. We're noticing attractive demand and pricing across most market segments that we engage with, as well as in our geographical locations. Aligning with our strategy of minimizing non-relationship credit activities, we have strategically exited about $75 million of shared national credits last quarter. This will be evaluated on a case-by-case basis going forward, as we continue redirecting business toward more relationship-oriented activities that are deposit-driven. Regarding the CRE portfolio, as Raj pointed out, we know there’s significant interest here. Slides 12 through 15 in your deck provide additional insights. Overall, our CRE portfolio is high-quality; it constitutes about 23% of the entirety of our loan book, which we feel comfortable managing at that level. It’s well-structured with high-quality properties, low LTVs, and attractive debt service coverage ratios, with 60% of the exposure located in Florida. The demographics in Florida remain extremely favorable. I conducted a tour of various offices across different markets this month, and can confirm that regions such as Orlando, suburban areas around Orlando, Tampa, and Miami show strong performance. Florida's unemployment rates are in the mid-2% range, reflecting drastically better economic metrics relative to other regions. By June 30, the weighted average LTV of the overall portfolio was at 57%, and the weighted average DSCR was 1.88. Approximately 16% of the CRE portfolio matures within the next 12 months, with about 7% maturing in that period being fixed-rate, which includes swap loans that are fixed to the borrower. Concerning our office portfolio, which always garners significant interest, we hold a solid position. We review every loan quarterly and have enhanced analytics to cover our office portfolio of just under $1.9 billion, approximately $1.85 billion. The average LTV stood at 66%, with a weighted average DSCR of 1.6 as of June 30. Substantially, all of the office portfolio is performing well. In total loans, we maintained $313,000 in nonperforming loans, with 95% rated as pass as of June 30. 59% of our office portfolio is in Florida, where demand and favorable demographics continue to thrive. In the context of our New York portfolio, we hold around $181 million in loans in New York City. All properties within this portfolio are performing well, with a 94% occupancy rate and a mere 5% lease rollover over the next 12 months. This substantial breakdown of our market assures us of a robust office portfolio. We've significantly advanced our analytic capabilities within this portfolio. With that, I’ll now turn it over to Leslie.
Leslie Lunak, Chief Financial Officer
Thanks, Tom. I'll provide more detail about some of the numbers now. As Raj stated, the NIM for the quarter was $247 million, compared to $262 million last quarter, which reflects a decline of 15 basis points. I reiterate what Raj mentioned about the NIM remaining stable throughout the quarter; April’s rate remained the same as May's, and was consistent in June as well, so we're happy to note that stability. The decline in NIM can primarily be attributed to the mix shift on average in our funding. We observed average deposits decrease by 7.94%, while average FHLB advances increased by $680 million, reflecting the impact of the March events. The stabilization has been quite notable, with deposits recuperating by the end of the quarter and FHLB backups reduced. Our cash levels also increased on average by about $300 million for the quarter. This collection of factors accounted for approximately 9 basis points of the decline in NIM. Towards the end of the quarter, we saw improvement, signaling stability in the NIM. The cost of deposits rose by 41 basis points, from $205 million to $246 million, and the rate increase in deposit costs shows a slowing trend this quarter. The average cost of FHLB advances rose from $427 million to $459 million, reflecting the additional wholesale funding added to the balance sheet during March. In the coming periods, I expect to see continued stability in the NIM as long as we can maintain our assumption regarding deposits and customer behavior, although those factors are tricky to predict in the current economic environment. On liquidity, approximately 66% of our deposits were insured or collateralized as of June 30, up from 62% from the last quarter-end. Our available liquidity on the same day was $14.7 billion at June 30, compared to $9.4 billion on March 31. The ratio of available liquidity to uninsured deposits improved to 167% at June 30 from 95% at March 31, reflecting positive trends. The provision for credit losses this quarter was $15.5 million, with the ratio of ACL to loans increasing from 64 basis points to 68 basis points. This quarter’s provision was influenced by a less favorable baseline economic forecast from Moody's compared to the previous quarter, and we assigned a greater weight to the downside scenario in our modeling to account for the risk of a possible recession. As a result, we shifted some allocations from qualitative to quantitative parts of the reserve this quarter, which you will find detailed in our slide deck. The reserve on pre-office was elevated to 83 basis points at June 30 from 56 basis points at March 31. We also integrated some qualitative factors into that reserve this quarter due to ongoing uncertainties but reiterate the positive outlook we have on the quality and potential loss content of the office portfolio. We have included stress testing results based on the CCAR severely adverse scenario in our slide deck for your review. In such a scenario, lifetime expected losses on the loan portfolio were projected at 2.2% for CRE, with 4.7% projected loss for office at $90 million. It's essential to emphasize that this is under the CCAR severely adverse scenario. In the Moody’s S4 recessionary scenario, projected losses for office were only 1.7% or $45 million. Hence, under hypothetical severe stress, this portfolio is projected to perform exceptionally well. Shifting gears to non-interest income, compared to the previous quarter, the primary driver was a loss of $13.3 million from preferred equity investments which did not repeat in the current quarter. As for non-interest expense, we noted compensation and benefits decreased primarily due to normal seasonal fluctuations in payroll taxes and benefits. There was also a recognition last quarter of $4.4 million in operational losses that did not recur. Looking forward, we anticipate that total non-interest expenses will remain flat in the second half compared to the first half. With that, I’ll turn it over to Raj to share any closing remarks.
Raj Singh, Chairman, President and CEO
No, I think we should go straight to Q&A.
Operator, Operator
Certainly. Our first question will come from Brady Gailey of KBW. Your line is open.
Brady Gailey, Analyst
Hey, thanks. Good morning, guys. I just wanted to start with the margin. I heard your guidance about how near-term you expect the margin to be stable. But I would think with the balance sheet of BankUnited, once the Fed hits the terminal rate, deposit costs are steady. You'll still have some loan repricings going higher. So is there a scenario that maybe in the medium term, you could see NIM expansion?
Leslie Lunak, Chief Financial Officer
Yes. Brady, there's a scenario even in the near-term where we could see NIM expansion. It all depends on the stability of the deposit base. The stable NIM guidance that I gave is predicated on a slight decline in NIDDA and a flat deposit scenario. So if we are more successful than we think we'll be, or if we're more successful than we think we can be, in growing deposits and keeping NIDDA stable, there is some potential upside, but that's all dependent on what we're able to do on the funding side, Brady.
Brady Gailey, Analyst
Okay. Got it. And then loan growth has been pretty flat in the first half of the year. Is that what we should think about for loan growth for the back half of the year as well, just not much of it?
Tom Cornish, Chief Operating Officer
Yes, from a core growth perspective, we anticipate growth in the commercial and industrial book, as well as in the commercial real estate book. Some of that will come from a shift away from residential and the business finance group; we foresee Pinnacle remaining relatively stable. This will represent a stronger segment of the portfolio in terms of yield. Growth is expected in the second half of the year, following a slight increase in the first half, while we will be compensating for this with the exit of lower-yielding assets. We naturally expect to see an improvement in yield as a result of these actions.
Brady Gailey, Analyst
Alright. And then finally for me, just on the share buyback. It doesn't look like you guys repurchased any stock in the second quarter. I know historically, you had been a big stock repurchaser; maybe just updated thoughts on the buyback heading into the back half of this year?
Raj Singh, Chairman, President and CEO
We stopped our buyback back in March. I think we may have a little bit left in the authorization, but we're not buying back stock. We will discuss this with our Board, as we do in the ordinary course. I think the Board meeting is in a month or so. Given the volatile times we've experienced, it was the right decision to halt buybacks for now. At some future date, the Board will decide to reengage, but that won't be any time soon.
Brady Gailey, Analyst
Okay. Alright, great. Thanks, guys.
Operator, Operator
Our next question will come from Jared Shaw of Wells Fargo. Your line is open.
Leslie Lunak, Chief Financial Officer
Good morning, Jared.
Timur Braziler, Analyst
Hi, good morning. This is Timur Braziler filling in for Jared.
Leslie Lunak, Chief Financial Officer
Okay.
Timur Braziler, Analyst
Do you hear me?
Raj Singh, Chairman, President and CEO
Yes, yes.
Timur Braziler, Analyst
Sorry about that. Maybe just starting on the credit, the increase in special mentions. I know you talked about your comfort in the commercial real estate book. And maybe just talking about the C&I portfolio. And more generally, what are some areas that you could end up seeing more stress if it's not coming out of the CRE book?
Leslie Lunak, Chief Financial Officer
First of all, I want to mention that the rise in special mentions does not indicate any correlated risk. We've conducted a thorough analysis and have a clear understanding of each of those credits. There is no correlated risk or systemic issues within any specific sector of the portfolio. Currently, we are not worried about loss content in these particular credits. In fact, we observed a decrease in the substandard category this quarter, which gives us confidence that credit is performing well, and we are not identifying any systemic concerns.
Raj Singh, Chairman, President and CEO
The larger loans that we had at the end of the quarter have already been paid off.
Leslie Lunak, Chief Financial Officer
Yes. And that's in the earnings release.
Tom Cornish, Chief Operating Officer
It's a $50 million exposure.
Raj Singh, Chairman, President and CEO
Yes. Sometimes the timing doesn't work as planned, and I wish that had paid off in the last week of June, but it waited until the 12th or 13th of July.
Tom Cornish, Chief Operating Officer
Yes, we had a couple of payoffs after the quarter-end. I would echo what Leslie said. There were a couple of idiosyncratic moves this quarter. We expect to see those come back, but there’s no overarching issues present from a specific industry sector. Our C&I book is very diversified across 100 different industry segments. As Raj mentioned, we saw two of those payoffs after the end of the quarter, and there's no particular sector that poses a concern. The health of the consumer remains robust...
Leslie Lunak, Chief Financial Officer
And none of it was commercial real estate.
Timur Braziler, Analyst
Okay. And then maybe just parlaying that commentary into the allowance. I mean, you guys have been pretty efficient in how you run the bank from an allowance standpoint; I appreciate the waterfall on the quarter-to-quarter changes. But as we look out going forward, the overlays that were applied in the second quarter, what would need to happen in the back end of the year to continue seeing reserve build? And is that kind of implied in your modeling as we get closer to whatever the recessionary period might look like?
Leslie Lunak, Chief Financial Officer
Again, the thing that would lead to reserve build is if the broadly the view of the future of the economy deteriorates. I personally do not expect that to happen, but I could personally be wrong. So that would be the thing that would really lead to a reserve build is if we saw deterioration in not only actual economic conditions but forecasted economic conditions. That would be the thing that would lead to significant reserve build. You'll also see some reserve build just happen naturally, as the composition of the portfolio shifts from residential to commercial, because the commercial portion carries higher reserves than the resi portfolio. So some of that will happen as well.
Timur Braziler, Analyst
Okay. That's good color. And then switching gears, just looking at the DDA stability that was encouraging to see in the second quarter. I know you talked about some of the municipal balances that are a bit seasonal in nature. But how should we be thinking about DDA balances going forward? Is there actually an outlook where you can see DDA...
Leslie Lunak, Chief Financial Officer
No, no. Can you tell us?
Raj Singh, Chairman, President and CEO
No, let me try and answer that. So in the relative stability you saw at DDA, that’s a net number. The gross number is different. And the reason for movement of money out of DDA into money markets or in many cases getting used for other purposes like purchasing a building or expanding a warehouse. That's what occurs. It's not that clients suddenly decided to retain all their deposits in DDA. The relative stability is attributed to the new business we have been successfully bringing in. We closed 35 new relationships in this quarter, mirroring our previous quarter's performance. Remarkably, we haven't missed a beat amid the distractions from March and April, resulting in the ability to maintain some stability in DDA. That consistent effort to fill the bucket faster than natural attrition is essential. While we anticipate gradual stabilization of this attrition, the bank's acquisition tactics must remain aggressive.
Timur Braziler, Analyst
Great. Thanks for the color.
Operator, Operator
Our next question will come from David Rochester of Compass P. Your line is open.
David Rochester, Analyst
Hey, good morning, guys. How are you doing?
Tom Cornish, Chief Operating Officer
Good morning.
Leslie Lunak, Chief Financial Officer
Good morning, Dave.
Raj Singh, Chairman, President and CEO
Good morning.
David Rochester, Analyst
On the margin front, with the stability you guys are looking for, I was just wondering what that means for NII going forward, if you're looking for stable levels there. And then on the deposit pipeline, you mentioned the $1.6 billion. I was wondering what portion of that was non-interest-bearing?
Leslie Lunak, Chief Financial Officer
Yes. So I would say on the NII outlook, again, Dave, it depends on the success that we have growing deposits, because we are, in the short term, focused on reducing the wholesale funding level. You saw some of that this quarter. So net loan growth will come from deposit growth. If we can achieve net deposit growth, that will translate into net loan growth, which will subsequently lead to NII growth. I’m not trying to be evasive; I just believe deposit growth and depositor behavior are difficult to predict right now. However, we believe we can succeed in growing deposits. That’s where we stand. Regarding the $1.6 billion, Tom, do you want to comment?
Tom Cornish, Chief Operating Officer
Yes. When you analyze that, Dave, since it’s sourced from our treasury management team, that largely encompasses operating NIDDA accounts.
David Rochester, Analyst
Great. Okay. And then on the expense front, you guys mentioned an expense management program when you were talking about that whiteboard at the beginning of the call, just wondering what you guys are thinking about on that front and what the chances are you could actually see lower expenses in the back half of the year versus the first half?
Raj Singh, Chairman, President and CEO
I would say flat expenses is the guidance I’ll provide. Henceforth, over the next couple of quarters, you shouldn't anticipate any expense growth. That growth doesn't occur independently in an inflationary environment. It’s a result of the initiatives we've been working on over the last two months, which are already being set into motion.
Leslie Lunak, Chief Financial Officer
While we are still investing in specific segments of the business, including hiring more producers and investing in growth opportunities, we haven't reached a point where we feel the need to implement drastic cutbacks only to face the challenge of rebuilding next year.
Raj Singh, Chairman, President and CEO
Yes.
David Rochester, Analyst
Alright, great. Thanks, guys.
Operator, Operator
Our next question will come from Steven Alexopoulos of JPMorgan. Your line is open.
Steven Alexopoulos, Analyst
Hey, good morning, everyone.
Tom Cornish, Chief Operating Officer
Good morning.
Leslie Lunak, Chief Financial Officer
Good morning, Steve.
Steven Alexopoulos, Analyst
I want to start on the loan side. So the pace of residential loan runoff was a bit elevated in the quarter. What explains that? Do you think runoff will continue at the pace we saw in 2Q?
Leslie Lunak, Chief Financial Officer
I believe the accelerated pace can be attributed to the fact we had some committed pipeline that we were utilizing in the first quarter; there hasn't been a real shift in amortization rates. Prepayment speeds are extraordinarily slow—so it's primarily just amortization activity. I don’t anticipate any significant changes here.
Raj Singh, Chairman, President and CEO
We haven't engaged in any inorganic measures; we haven’t sold anything. We tightened new originations, which reflects the quarter’s changes. Thus, we do expect that runoff trends will mirror those of the earlier quarters. It’s important to note that a healthy portion of our portfolio comprises arms and hybrids, which naturally have a lower CPR than the fixed rate. This is a beneficial characteristic in the present environment, and I anticipate further runoff in the third and fourth quarters, alongside some runoff in the securities portfolio, though likely less than this quarter. So yes, we expect continued trends.
Leslie Lunak, Chief Financial Officer
I believe based on our present knowledge, the residential portfolio could drop by approximately $450 million by the end of the year.
Steven Alexopoulos, Analyst
Got it. Okay, That's helpful. On the commercial side, given that your core markets are fairly vibrant, I'm optimistic on the call. Why are you seeing stronger commercial loan growth here?
Raj Singh, Chairman, President and CEO
Again, the devil is in the detail. While we are indeed growing our core business, we are also letting go of non-core or solely credit-driven business, like the $175 million in shared national credits as an illustration, as well as some of the leasing businesses, which have been decreasing for the past few quarters. Our core business, which is supported by deposits, is growing healthily. Even in New York, there's notable growth. What is not growing or shrinking comprises transactional activities.
Tom Cornish, Chief Operating Officer
I would also highlight that opportunities in the shared national credits area, although they may not mature immediately, can offer upsizing opportunities or certain redials over a 12-month horizon. Our middle-market efforts develop over time. However, we’re currently enjoying a solid quarter regarding closings, fundings, new originations, and other activities. But those come phase out over time instead of all at once, which is not the case with shared national credits—where we have the chance to shift strategies to aim for a higher-generating bilateral loan business supported by deposits and treasury management.
Steven Alexopoulos, Analyst
So should we expect net commercial loan growth in the second half? Or is this a…
Tom Cornish, Chief Operating Officer
Yes, yes.
Leslie Lunak, Chief Financial Officer
Yes.
Steven Alexopoulos, Analyst
Okay. Enough to offset the $450 million, Leslie; will we see flattish loans? Will there be enough?
Leslie Lunak, Chief Financial Officer
Yes, I think so, Steve.
Steven Alexopoulos, Analyst
Okay, that's helpful. And then final question. So Raj, in terms of getting back on the offense here, back to the long-term plan, when you launched BankUnited 2.0, the industry had their eye off the ball regarding non-interest-bearing deposits. Now, everyone is attempting to grow and retain noninterest-bearing deposits. Do you reenter the market with the same playbook? What's your ability now to improve? I know the pipeline is fairly strong presently, but it’s a different environment today than where it was even a year ago.
Raj Singh, Chairman, President and CEO
Listen, the most common inquiry I receive from investors is regarding the future of NIDDA as a percentage of overall deposits post the industry's correction. Projections vary—from the suggestion we might revert to 2019 levels to a few that say we could return to 2008 levels. I want to remind everyone that we were not in existence in 2008, so I'm quite certain we won’t reach those levels. However, stabilizing DDA through the acquisition of new business is of utmost importance for long-term value creation and for short-term earnings as well. Therefore, our priority remains on the $1.6 billion pipeline over all else. Executing against that pipeline is our primary focus. Our long-term plan remains anchored in enhancing both the quality and quantity of our deposit base. To achieve this, we require additional funding to expand our core lending capabilities without exceeding the 100% loan-to-deposit ratio—something I have been very clear about. We’re pleased to provide more breathing room this quarter. However, if we can generate even more room, it would be advantageous. Absolutey do not want to be at or above a 100% ratio. Our long-term strategy is stable; if that changes frequently, it’s likely not a true strategy but rather reactive tactics. We aspire to put the recent noise behind us and concentrate on executing what has always been our mission; environments and interest rates may fluctuate, as do economies, but our fundamental aim remains unchanged.
Tom Cornish, Chief Operating Officer
Steve, I would add a few remarks to that perspective. One would emphasize the rigorous focus on execution. Secondly, the recent addition of several exceptional producers has been vital to our growth strategy. Additionally, we continue investing in technology-driven cash management initiatives, including API connectivity and other integration opportunities. Our strategy centers on focused personnel and products, which will be paramount to achieving our goals.
Steven Alexopoulos, Analyst
Got it. Thanks for the insights.
Operator, Operator
Our next question will come from Brody Preston of UBS. Your line is open, Brody.
Brody Preston, Analyst
Hey, good morning, everyone.
Tom Cornish, Chief Operating Officer
Good morning.
Leslie Lunak, Chief Financial Officer
Good morning, Brody.
Brody Preston, Analyst
I just wanted to ask real quick on the securities yield. I think it was 65% to 70% floating rate, Leslie, is what I had written down. And so the yield came up a little bit less than I was looking for. I was hoping maybe you could give me some details as to why?
Leslie Lunak, Chief Financial Officer
Yes. It is about 68% floating, and Brody, I don’t have all the exact numbers around this with me. But there are some securities in the portfolio that hit caps. And that’s why that trajectory came down a little bit.
Brody Preston, Analyst
Got it. Okay, thanks for that. And then I did want to ask just on the spot rate on the interest-bearing deposit costs. It didn't look too far off from where the average would suggest where you would end the quarter. I guess when you look at the expected trajectory going forward on the interest-bearing deposit costs, do you have a sense for what the expected step-up is within the margin guidance that you gave?
Leslie Lunak, Chief Financial Officer
Brody, it is going to step up again. I think without question, next quarter.
Raj Singh, Chairman, President and CEO
Time deposits ...
Leslie Lunak, Chief Financial Officer
Time deposits are rolling on us, so far, the all-in beta, including CDs, is a little over 50%. I anticipate that it will incrementally rise before we hit terminal rate, which is going to raise costs further.
Brody Preston, Analyst
Got it. And I also wanted to ask on the non-interest-bearing. When I analyze the average balance sheet during the period, it sort of implies that you had an increase in non-interest-bearing in the back half of the quarter, Raj, or maybe this is for Tom. Could you provide context on what caused this rebound in non-interest-bearing during the latter part of the quarter? Was there a seasonal element driving that? And should that trend persist?
Raj Singh, Chairman, President and CEO
I don’t believe anything seasonal was a factor, no.
Leslie Lunak, Chief Financial Officer
No, I don’t think so.
Raj Singh, Chairman, President and CEO
We do observe fluctuations month-end versus mid-month, which inherently cause deposit flows. However, there was nothing noteworthy to mention. It likely corresponds to the sales cycle when certain deals either occur or don’t. Our overall effort has yielded 35 new business relationships this quarter, matching our last quarter's performance, and maintaining this momentum amid what was an undeniably distracting period during March and April is a significant achievement. Without these efforts, we likely would have lost more DDA stability. It’s crucial to actively fill the bucket faster than what's being lost.
Tom Cornish, Chief Operating Officer
No, I would say typically, we see a trend of corporates wanting to bolster liquidity at quarter-end for financial reporting. Other than that, not much else.
Leslie Lunak, Chief Financial Officer
I don't believe anything out of the ordinary occurred, but the latter part of the quarter was characterized by stronger onboarding of new accounts compared to the earlier part of the quarter, which was a strange time overall.
Raj Singh, Chairman, President and CEO
Yes, more or less that may be it. It was quite different in April compared to what we began seeing later on.
Brody Preston, Analyst
Got it. Okay. And then Raj, just on the title solutions, that's obviously your largest segment, now sitting at $2.7 billion. I think it was a zero deposit business back in 2018, but you've elaborated on other noninterest-bearing deposit businesses that have arisen since then. I am aware that nothing surpasses $1 billion, but I wondered for more granularity beyond title solutions—what additional areas of success have you seen in building non-interest-bearing deposits over the past several years? Have they differed from the excess flows of noninterest-bearing deposits we saw during COVID?
Raj Singh, Chairman, President and CEO
Just to clarify, the title solutions aren’t all in DDA; it's a majority in operating accounts and entails a relatively low cost of funds. That being said, I’d highlight the HOA business, which we cultivated over recent years and that has also climbed toward $1 billion. This segment displays a healthy amount of DDA, combined with some money market elements as well while also experiencing rapid growth. They’ve already fulfilled their yearly targets by June, showcasing an impressive performance. There are other initiatives that we’re currently investing in which haven’t launched yet, and I prefer to remain quiet about them for competitive reasons. Nonetheless, we’re consistently conducting trials regarding new niche opportunities that vary in success. Presently, we’re pouring effort into one initiative that may yield fruit in two to three years, similar to how our title business grew unnoticed in 2018 or '19.
Brody Preston, Analyst
Got it. And lastly for me, we've observed several banks selling office loans this quarter. Outcomes can vary significantly based on the specific type of office building; however, your book seems to perform well. Have you had any concerns about strategically exiting specific holdings within the portfolio?
Leslie Lunak, Chief Financial Officer
I do not foresee any rationale for selling that portfolio at a discount; we have confidence in the holdings we possess.
Tom Cornish, Chief Operating Officer
Yes.
Brody Preston, Analyst
Fantastic. Thank you, guys, very much for the questions. I appreciate it.
Tom Cornish, Chief Operating Officer
Thanks.
Operator, Operator
Our next question will come from Christian DeGrasse of Goldman Sachs. Your line is open, Christian.
Christian DeGrasse, Analyst
Hey, good morning.
Leslie Lunak, Chief Financial Officer
Good morning, Christian.
Christian DeGrasse, Analyst
So just another follow-up on the $1.6 billion pipeline. What type of customer demographic and geography is this coming from? It just seems that deposit competition is as fierce as it's ever been right now, and that's like a really valuable amount. So where are you really seeing this opportunity?
Tom Cornish, Chief Operating Officer
Yes, I'm going to provide a somewhat unexpected answer here. The opportunity is everywhere. Our clientele spans across our various geographies, including HOA—as Raj mentioned, title solutions, as well as in C&I and core middle market sectors situated in New York, Florida, and Atlanta. We’re poised to seize opportunities from all corners.
Raj Singh, Chairman, President and CEO
I want to clarify, this doesn’t mean that $1.6 billion of growth is going to occur this quarter. This is a pipeline. It can take two to three quarters to execute. Not every opportunity will materialize as expected in this environment, but we are concentrating on this more than anything else.
Christian DeGrasse, Analyst
Yes. Thank you. That's definitely very helpful. And then Leslie, I think you mentioned a number of different scenarios you guys were looking at, at the NIM. If hypothetically, we see a rate hike this week, and we stay in a higher-for-longer scenario for quite some time, call it, over the course of a year, I think Tom mentioned some attractive new loan yields you guys are putting on. However, how do you see deposit rates shifting in a prolonged rate pause environment?
Leslie Lunak, Chief Financial Officer
So Christian, the guidance I provided is predicated on a forward curve that, at the time we issued the forecast—feels like it changes every five minutes—had two rate hikes anticipated. Currently, our analysis shows a probability of one rate hike and then a pause. Given that, I expect deposit betas to escalate slightly, and we find ourselves presently operating in the low 50s, anticipating exceeding that before we normalize rates, thus raising costs further.
Christian DeGrasse, Analyst
Thank you.
Operator, Operator
Our last question will come from Jon Arfstrom of RBC Capital Markets. Your line is open.
Jon Arfstrom, Analyst
Thanks. Good morning.
Raj Singh, Chairman, President and CEO
Good morning.
Leslie Lunak, Chief Financial Officer
Good morning, Jon.
Jon Arfstrom, Analyst
I appreciate you letting me and I'm exhausted on the $1.6 billion deposit conversations. A couple of big-picture questions. Raj, you talked about the tactical near-term exercise you've gone through. Is that same exercise a priority right now? And what would be the near-term tactical priorities for you?
Raj Singh, Chairman, President and CEO
Some of that is still relevant, others not so much. Honestly speaking, our liquidity levels and uninsured deposits relative to available liquidities feel less critical today than they did just 90 days ago. Nonetheless, stability regarding NIM, expense management, and specifically deposit growth remain top priorities. We'll still monitor liquidity metrics, though that emphasis may lighten. In March, I was receiving several emails daily regarding wires. I no longer receive such reports, which is a positive shift. We’ve returned to a state where I can focus on more pertinent aspects of the business.
Leslie Lunak, Chief Financial Officer
I receive more than he does.
Raj Singh, Chairman, President and CEO
Exactly. So yes, certain areas discussed on the whiteboard remain crucial, while others may be deprioritized.
Jon Arfstrom, Analyst
Okay, good. There are various ways I could continue, but one more overarching question: The Shared National Credit, the single relationship transactional pool, how extensive is that? Do you foresee bringing that down, or will it remain in a churned state?
Tom Cornish, Chief Operating Officer
It will gradually decrease. The portfolio expanded during the pandemic when we sought to leverage liquidity in a favorable trend, given local middle-market business conditions. Yet, this has never constituted a central strategy for the firm. We're committed to maintaining quality relationships while minimizing involvement in shared national credits that lack commensurate deposit activity. We're generally pleased with this but are committed to redirecting our efforts in accordance with our long-term objectives.
Jon Arfstrom, Analyst
Okay. Have you indicated how large that portfolio is?
Leslie Lunak, Chief Financial Officer
No, we have not disclosed that. We have mentioned total shared national credits in the past but haven’t provided specific details associated with this particular segment, as some elements comprise relationship-driven activities. I don’t believe we’ve examined that closely.
Jon Arfstrom, Analyst
Okay, good. I’ll let you go. Thank you very much. I appreciate it.
Leslie Lunak, Chief Financial Officer
Thank you.
Operator, Operator
And I am showing no further questions at this time. I would now like to turn the call back to Raj Singh for closing remarks.
Raj Singh, Chairman, President and CEO
I’ll conclude the call as I began; it certainly feels different from 90 days ago, and we are grateful for that shift. We are pleased to refocus on our longstanding objective of building a long-term relationship-based bank. Thank you for your engagement, and we look forward to talking again in 90 days. Thank you, and goodbye.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.