BankUnited Inc
NYSE:BKU
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BankUnited Inc
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Good day and welcome to the BankUnited First 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. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Corporate Secretary, Ms. Susan Greenfield. Please, go ahead.
Thank you, Sherry. Good morning, and thank you for joining us today on our first 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 reflects 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.
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.
Thank you, Susan. Welcome everyone. Thank you for joining us today. It's been an eventful quarter. We have a lot of information to share with you, so this call may be a little longer than usual. Let me start by saying, making a simple statement, our business is stable and growing, our liquidity position is strong, and our capital base is robust. These -- if all you take away from our call is just that that's sort of the most important thing in all the remarks that we will make.
Let me elaborate a little bit on each one of those three things. March 13th, you know the week of March 13th was certainly disruptive. It cost us about a 1.8 billion in deposit balances. The deposit flows basically the week after that returned to normal. In the last two weeks of the quarter, we actually saw a build of about 245 million in deposits, which is very normal for us. We always see a build in deposits late in the quarter, usually late in the month, but certainly late in the quarter.
Our liquidity position, 62% of our deposits are either insured, FDIC insured or are collateralized. And currently we have 12.3 billion in same day availability, which equates to 128% ratio of the uninsured deposits to collateral -- and uncollateralized -- uninsured and uncollateralized deposits. Our capital position as you already know is strong. Our CET1 is 10.8%, at the bank level it's 12.5%. We have suspended our buyback given all the volatility that we're seeing in the markets. We will revisit it again later in the year, the decision later in the year. And also just the CET1 ratio of 10.8%, if we were to actually put our AOCI mark through it, it would still solve to a 9.4%. And of course with the suspension of buyback now the CET1 ratio will start to accrete every month, every quarter. So based you know on just those things I'll reiterate again, business is stable and growing. Our liquidity position is strong and capital base is robust.
Let's talk a little bit about the quarter and let me make some remarks about loans and then really most of my comments will be about deposits as you can imagine. From a loan perspective this was -- first quarter is our slow quarter as you can go back and see many years, I think last year, last couple of years it was a negative growth quarter. This quarter it was basically flat. So there was nothing really interesting and exciting. It is our slowest quarter of the year and it came in just as we had expected with basically flat numbers. There's some growth in C&I, some reduction in resi, but that was all pretty much predictable.
On the deposit side, I would say that the quarter you could split it into two halves. You can talk about from January 1st all the way to the events of the March 10th, March 11th, that weekend and then what happened in the three weeks after that. So just before these events happened, so by March 10th, we were down about $277 million in deposits and like I said a little bit earlier intra month, intra quarter we are usually down and then month end and quarter end we usually see a build. So when I am standing on March 10th and looking at a negative 277 million that generally means we will end the quarter at least flat and most likely up. So that's what we were expecting. We did see of course a shift from interest -- non-interest bearing to interest bearing. So that that trend was happening in January, February into March as well. But, before all of this chaos happened, it was looking like a fairly normal quarter both on the lending side and on the deposit side.
And then March 10th, 11th, 12th that weekend happened, we saw outflows of about $1.8 billion in the very first few days most of it was on Monday. Some of it actually was on Tuesday and Wednesday, but by the end of that week things have basically gone back to normal. Our nervousness was still high, but what we were seeing in the deposit flows, it went back to normal by the following Monday. And then from there on while we were in heightened alert, we really did not see any unusual activity just except for that one week, for the week of March 13th. And like I said, as we always expect, deposits start to grow towards the end of the quarter and we ended up where we did.
We did a deep dive into exactly where that 1.8 billion came from and it really came from 10 relationships. Two of those ten relationships I would say surprised us. The eight did not because the eight would, I would say we're in the category of institutional customers often with fiduciary responsibilities, who decided that regional bank sector not banking on it, but regional bank sector was risky and they wanted to pull money out from all regional banks. Two were very core businesses where they didn't take money out completely but they derisked from us and one client took out about half the money, the other one took out a little more. And that is core money which was very profitable from a margin perspective and we're working hard to bring that money back or at least some of that money back.
We also took a look at -- I asked Leslie who said, okay, we get this 10. How about we look at the top 100 customers. Is there anything else happening in the sort of the other 100 customers. And Leslie went back and said, you know what, nothing happened in the first 100 customers. We looked at customer by customer, we didn't see any flows, nobody closed, nobody pulled money out. I would say, you know what, let's do over 200 customers. Let's go another 100. And again, there was nothing that we found. So it was really limited to 10 clients. It was limited to -- it actually all was Monday and Wednesday for some reason. Most of it was Monday and Wednesday. And after that, it's been pretty normal. Now I would like to make it clear that this money has not come back and we are not engaging very strongly to bring that money back because this money kind of showed us exactly how nonstrategic it was, and we probably shouldn't have had that much of this money here anyway. So we have not engaged in any meaningful way to try and bring back this money. And the comments I'll make about the pipeline and stuff we're doing there on will be separate, will be removed from this 1.8 billion, which I don't talk about in a different place.
Let's see here. So in terms of our reaction, what we did that weekend and in that week, this shouldn't surprise anyone, I'm pretty sure every bank was doing this. We were hearing things about how the FHLB system is getting taxed and posting collateral is an issue and so on. So we did not see that actually on our end. We drew down $2 billion in cash on that Monday morning without any issue. We posted collateral with the Fed at the FHLB and stayed in constant communication with our regulators, with of course, Fed and the FHLB. We equipped our RMs and branch personnel with all the information that they needed, we offered ICS reciprocal program, which you've always done in the past. It has never really been much of a product of interest, but we did offer that more widely. We held obviously lots of employee calls. And so it was basically communications one-on-one is what we were doing most of that week.
It did for a period of time, slow down the sales process if everyone was distracted in sort of the middle of March towards -- all the way into end of March. But I'm happy to say, and I'll get into this in a little more detail that it has not derailed in any way, the pipeline that we were working on. That was my biggest fear, like when this was happening, on one hand, it was what's happening with deposits that we have currently. And the second question was what will this mean for going forward in terms of the pipeline that we have when we are going to protect it or not. And I'm happy to actually say that not only have we been able to protect it, but grow that pipeline. And a few more comments in a couple of more minutes.
So let me say, deposit growth is hard. It's challenging, but it's also the number one strategic priority for the company. And when I say deposit growth, I mean core deposit growth. The pipeline that I just talked about in a little bit, we do pipeline reviews all the time, both on the lending side and the deposit side. We did one actually just before this crisis happened in mid-March, we did one in early March. And I spent a good part of yesterday going through our pipeline in preparation for this meeting. The numbers today are significantly better and higher than the numbers a month ago, which is why I was feeling very good yesterday.
There's a couple of reasons for it. One is just some delayed activity which didn't fall off completely, but just got delayed. But one large part for that healthy pipeline is that out of this chaos comes also an opportunity. We've had a couple of really large bank sales and others were struggling and they're throwing off a lot of business. And while we don't completely fall -- don't have a perfect overlap, let's say, with Silicon Valley Bank, and I'm not sure we're going to benefit from that, there was some overlap, between the kinds of business we have and Signature had. That actually, I think, was also part of the reason why we saw the pain, but also that is what is creating an opportunity. There's a lot of talent and a lot of business that has been thrown off. And I have actually interviewed more producers in the last month than I did all of last year. And so while there is a moment of caution, it is also a moment of opportunity, which -- and we have to capitalize on that.
So the pipeline for deposits look healthier than they did a week before this happened, and we are doing everything to capitalize on them. And this was done based on a very detailed review, account by account relationship by relationship. By the way, I did tell my team members or my entire producing staff that we're no longer in the business of home runs, we're only in the business of singles and doubles. What this means is we have to build more granular but we've been saying this actually for the last couple of years, but now it is even more important, that this business that is being thrown off is a lot of big ticket business being thrown off, that's not what we're interested in, its core middle market, small business, which we want to build the pipelines on and the business over the long term.
So let me talk a little bit about guidance. So in terms of deposits, like I said, we feel pretty good about the pipeline that we have of core business, put aside the $1.8 billion that is left aside. I mean, there is probably some part, like I said, on the $1.8 billion, which would be good and strategic and we would like to bring back. But I'm not very excited about bringing a lot of or any of this very lumpy price sensitive. We always knew this was price sensitive, but in this Black Swan event, it also showed us that it's very nervous money also. So I'm not sure there's much we can do with that kind of nervous money. So I'm not looking to bring this back, at least not in the way that it was here before.
On the lending side, the economy is doing just fine. I mean my comments generally, I always talk about credit, but I don't really have much to talk about credit. So I'll just leave it at saying that credit is fine, and that's not what we're losing sleep on, especially Florida is doing phenomenally well. Loan pipelines are healthy. But we are going to be careful in what kind of loans we do. We're going to do loans where we have the full relationship. And just credit-only transactional business, we are not going to do or we're going to deemphasize. The resi portfolio is strong this quarter that you should expect it to keep shrinking over the course of the rest of the year. The last -- through the pandemic, when we were nervous about doing a lot of commercial business, but we had deposit inflows, the place where we put that money was the bond portfolio and resi, and we have gotten heavy in those classes. And I think you should expect both, just like we did saw this quarter, securities run down and the resi portfolio will run down over the course of the rest of the year.
C&I will grow given the pipeline that we're seeing and fairly healthy. I think at some point, if the economy really slows down and we do enter a recession, then maybe not. But right now, I don't see that, so I am predicting good C&I growth. CRE, I would say, is somewhere in the middle, probably stay flattish. And overall, last Leslie will talk about margin and she will walk you through the back-end, left the more fun stuff for Leslie, and I took some notes before this call to make sure I cover everything.
We did increase the dividend by $0.02 this quarter as we did this time last year as well in February of last year. We did buy back stock $55 million of stock until we stocked [ph] it. There's a little bit of room left in the authorization. But like I said, our buyback remains -- will remain suspended until we see most stability in the economy and in the liquidity situation that the banking industry finds itself in. Let me see, that's it, I'm going to pass it over to Tom, who will go through a little more detail on the numbers before Leslie will finish, and then we'll take questions.
Great, thanks, Raj. So Raj covered the deposit outflows a little bit. I thought I would talk a little bit more about what the deposit pipeline looks like and sort of what we're seeing in new client relationships. So market share will be the name of the game, I think, as we look at growth from this point on. If we went back into Q1, we had well over 500 new commercial relationships between the commercial teams and the small business teams. That consistency has carried us through over a long number of quarters now.
We feel really, really good about what the deposit pipeline looks like over the near term, this quarter, next quarter, the rest of the year. And I'd say it's a couple of different areas. We've got a number of specialized teams. We continue to invest in TM products, payment capabilities, specialized products within verticals areas like HOA and our title service business are two examples of that. We've invested, as you know, a good deal on our digital capability for the small business side, small business relationships are coming in over -- in the 400 range every quarter. We think that's a good place for us to invest in future deposit growth. We've recently rolled out a new consumer checking product that we believe will be attractive. As Raj mentioned, while we don't have a lot of overlap with Silicon Valley, we do have some overlap with banks in New York that have been in the news for the various challenges that they've had, and it's presented us a strong number of new account client opportunities in the New York market from those banks.
We've continued to onboard new relationship managers in all geographies and verticals. You probably saw a press release that we on-boarded an entire team from HSBC in Florida that specialize in multinational business across the state. We're very interested in that. We saw continued good growth in the Atlanta team and business in the Atlanta market has been very strong. Last week, we opened up our office in Dallas. We hired CRE Dallas head. That's our first hire in the market. Pipeline is starting to build in Dallas already. And I think over the course of the next week or so, you should expect to see us make a significant team acquisition in the New York market that we'll be able to finalize in the next couple of days. So we continue to invest in people, we continue to invest in teams, both in the geographies and the verticals that we're in.
If you take a look at Slide 8 of the deck, it's got some breakouts of deposit verticals. Our largest is in the title solutions business with total deposits of around $2 billion. Over 85% of these are in operating accounts, there are over 8,000 accounts in this space with 950 relationships. And this segment has actually been very stable and grew by $100 million as of the end of March. There are really no other industry segments where we have deposits of over $1 billion. The loan-to-deposit ratio ended the quarter at 97%. While we're so comfortable with that, we would like to see that come down into the low 90s as the deposit base develops and we do some of these shifts, as Raj mentioned, from residential to commercial and other areas.
So I'll talk a little bit about loans for a moment. Consistent with the strategy that Raj laid out, residential declined by $111 million in the quarter. The commercial segments in the aggregate grew by $118 million. As Raj said, we continue to see solid pipelines of opportunities across the commercial segments, all geographies, all segments. And it was a good growth quarter for a quarter that typically is a negative quarter. We have not grown typically in the first quarter and we did. And as you all know, generally, you don't see financial statements in the first quarter, so it tends to be a slower quarter.
Overall, C&I grew by $173 million. CRE and BFG were down just a bit. Pinnacle was up modestly, and Mortgage Warehouse was stable for the quarter. Going forward, expect growth in middle market C&I, traditional new geographies, modest selective growth in the CRE segment. But BFG will continue to decline, and Pinnacle will probably see some growth in relationships that tend to be deposit-oriented relationships within that line of business.
Take a few minutes to speak about the CRE portfolio. Obviously, there's been a lot of press on this topic in the office segment in particular. I would point out that CRE is just slightly less than 23% of our total portfolio. So I think for banks in our size range, that's a pretty conservative level and is down significantly from where it would have been, now 24% over where would have been two years ago before the pandemic. So we have de-risked this portfolio substantially, a lot of that has been in the rent-regulated space in the New York market and given how events have played out in that segment we've been very happy with that decision.
If you take a look at Slides 20 through 22 in the supplemental deck, it will give you some detailed information about the portfolio. I would say, when you look at the office section of it, 60% is in Florida, where the demographics have been very favorable. I think everybody is very familiar with the job growth in Florida, new business starts, in state migration is very strong. Our portfolio is well diversified across all markets, no significant concentration in any one market. It's in Miami, Fort Lauderdale, Palm Beach, Tampa, Orlando, Jacksonville and all markets that are showing very, very strong growth overall.
If you look at the weighted average loan-to-value in the portfolio was 57%. Weighted average debt service coverage ratio was about 1.9%. And if we look at maturities in the next 12 months, 8% would fall into the category of where they are either fixed rates either by our own balance sheet rates or swaps. So our upcoming maturity over the next 12 months for resets is relatively modest within the portfolio. Specifically in respect to office, which we continue to closely monitor, that portfolio is about $1.8 billion. Again, 58% of the portfolio is in Florida, where demand and absorption continues to exceed supply. Only 9% is in the Manhattan market. And in the Manhattan market only 5% actually has lease rollover within the next 12 months. It's one of the smallest markets where we have lease rollover, 14% is on Long Island in the boroughs, and neighboring states and 19% is in other areas with no particular concentration.
Weighted average LTV of the office portfolio is 64% and the weighted average debt service coverage ratio was 1.7%. And the overall portfolio in office rent rollover over the next 12 months, it's just a little over 10%. So again, very modest. If we look at the office book in the last five years, our cumulative charge-offs have totaled only $2 million in the entire portfolio. So we're very confident that the overall fee portfolio is a quality portfolio, and we look at the diversification and metrics of the office portfolio. We feel very good about where we're positioned in office. So with that, we'll turn it over to Leslie for more details on the quarter.
Thanks, Tom. So in summary, net income for the quarter was $52.9 million or $0.70 per share. Speak a little bit to the NIM. The NIM declined to 2.62 for the quarter compared to 2.81 last quarter, up from 2.50 for Q1 of 2022. We obviously missed guidance, our NIM guidance that we gave you in January. While earning asset yields did continue to increase as expected, securities from $433 million to $495 million and loans from $472 million to $510 million, we underestimated the amount of mix shift that occurred between NIDDA and interest-bearing deposits. And certainly, we didn't anticipate the events of March.
Overall, non-interest bearing DDA was down about $780 million and average cash balances for the quarter were up almost $300 million, all of that happening, obviously, at the end of March, and offsetting all of that with a $1.1 billion increase in wholesale and other high-cost funding at current market rates. And we estimate the impact of that overall mix shift on NIM this quarter to be about 14 basis points. The average cost of deposits went up from 1.42% to 2.05% and the cost of FHLB advances went up from 3.44% to 4.27%. That advanced portfolio is by no means optimized in order to retain the maximum flexibility. We kept that short, which is right now the most expensive part of the curve. And we're working right now on optimizing the composition of that portfolio.
Looking forward, I will just say that any guidance we give you about the NIM is, I would say, fraught with peril but it's a very difficult thing to predict right now. But I will give you at least I'll lay out one scenario for you. Given the starting point and the fact that we're still holding a higher than normal level of cash on the balance sheet, the NIM will be under pressure again next quarter. I'll give you one scenario, if we're able to -- if we keep deposits and the funding mix flat over the remainder of the year, see the strategic shift in loans that Raj described, I'd expect the NIM for the year in the 250s. We think we can do better than that. We do think we can grow deposits and improve the funding mix, in which case, it will be a little bit better than that.
A few more details on liquidity. You can see in Slides 8 through 10 of our deck, I'll reemphasize what Raj said, 62% of our deposits are insured or collateralized at March 31st. Currently, same-day available liquidity is $12.3 billion, which provides us with 128% coverage of uninsured and collateralized deposits. Deposits in the ICS recyclical program grew from about $94 million at March 13th to about $574 million currently. So we have seen some interest in that program.
With respect to the securities portfolio, I'll just emphasize, as you're aware, with the exception of one tiny little $10 million bond, all of our securities are available for sale. The pretax mark on the available for sale portfolio improved by $100 million this quarter. And again, I'll point out that if AOCI will run through our regulatory capital ratios, CET1 would still be a healthy 9.4%, significantly in excess of the 7% well-capitalized requirements, including the conservation buffer. The duration of the portfolio was 1.95 and 68% of it is floating rate.
Moving to a little bit of discussion of the provision and the reserve. The provision this quarter was $19.8 million, that was down from the prior quarter. I'll remind you, we kind of took our pain in the fourth quarter. We added $16 million of qualitative overlay in the fourth quarter related to economic uncertainty specifically. And most of that is still there. This quarter's provision does reflect further deterioration in the baseline forecast and an increase in some specific reserves. The ACL coverage ratio increased from 59 basis points to 64.
Our Economic Forecast Committee selected the Moody's baseline as it's reasonable and supportable forecast for this quarter. However, a significant qualitative overlay that we established in the prior quarter still remains with respect to uncertainty about the economy. We believe our current reserve level is sufficient for a mild recessionary scenario. The ACL coverage ratio would be expected to move up with a mixed shift from resi to commercial that we are expecting to happen over the rest of the year and will obviously increase further if the economic outlook deteriorates materially from here, which we don't currently expect.
We provided you with some stress testing results for the CRE portfolio in the deck. This was run with the Moody's S4, which is a pretty severe recessionary scenario and lifetime losses on the free portfolio totaled about $97 million in that scenario. Now, while we don't want that scenario to materialize, if it does, I think that's a very manageable level of credit losses. I know we're going to get a question about this, so I'll head it off. We believe that the level of our CRE reserves currently as well as those stress testing results, and remember, we're in the same model as everybody else is using here. We believe those numbers are reflective of the high quality of that commercial real estate portfolio.
Decline in non -- one more thing I'll say, there was a modest increase in criticized and classified loans this quarter. Almost all of that was attributable to one loan that paid off yesterday. So that's back down to where it was before. The decline in non-interest income this quarter resulted primarily from $13.3 million in losses on preferred equity investments that impacted EPS by 13% and the issue that has been leading to most of those losses has now been liquidated. $0.13, what did I say. [Multiple Speakers].
Non-interest expense quarter-over-quarter, probably the only thing worth mentioning there is $4.2 million in operational losses that we took this quarter. There were two incidents there, one was a check kiting scheme and another was a customer that we had who was hacked or defrauded, not us, the customer during the quarter, and we made the decision to -- I think we ended up reimbursing that loss. With that, I will turn it back over to Raj for any closing comments.
No, let's open it up for questions. I'm sure there are plenty, and then I can maybe make closing comments at the very end.
Thank you. [Operator Instructions]. Our first question will come from the line of Jared Shaw with Wells Fargo. Your line is open.
Hey, good morning. Maybe just starting on credit, Leslie, you mentioned that the -- you were paid off on a loan that was in criticized and classified. Is that also the loan that increased nonperformers, the C&I loan, is that the $20 million increase in non-performance?
No, Jared, it's not. I would say nonperformers are up by a negligible amount and no trends there, nothing unusual. We're seeing, I think those are just normal puts and takes.
Okay. So that $20 million increase in the C&I side is it's not tied to one or two loans, it's more diversified?
Yes. And I just think it's not that long. I just think, like I said, it's normal puts and takes. There's nothing, it's one loan and I don't think it's anything indicative of anything systemic or any kind of trend.
Okay. Really appreciate the color on the commercial real estate side, especially the office and looking at the trends in the New York office space, you have really good debt service coverage ratios and loan to values. But how are you -- what's your thoughts in terms of what those landlords and property owners are going to do when those property or when those loans come due, do you think that they have an appetite to add equity and refinance or do you think you're going to see more property sales at that point when those loans come due?
Yes. What I would say on that, Brady, is that when we look…
Jared.
Jared, I am sorry, particularly in the New York market the quality of the sponsors that we have in the New York portfolio, the deep pockets that they have, the fact that these are predominantly generational assets that they have owned for a long period of time, I think that they will maintain these assets over that period, and I think they will stand behind the properties and inject equity if that's what's needed at the time. Right now, the lease rollover and the maturities are relatively light in that book. So we'll see what plays out over the next couple of years. But I would say when we specifically look at the New York Manhattan office portfolio, the quality and depth and capability of the sponsors gives us great comfort.
Okay. That's good color. And then on the opportunity, you said CRE relatively flat. But when you look at New York City, especially with Signature now gone and maybe somebody like an NICB more at capacity, do you think there's going to be additional opportunity for commercial real estate there, and maybe even in rent stabilized multifamily with some of the law changes that we're seeing? Or is that still an area you're not that interested in expanding?
I'll take that one. We look at all opportunities that come to us, but we're not yet jumping with excitement on that opportunity. CRE going into a slowdown of the economy with all the question marks that come with that, we're not too bullish on trying to grow CRE. I mean we work very hard to shrink CRE portfolio by $2 billion over the last -- since the pandemic. And we've derisked the portfolio very nicely. I'm never saying never, but that's not where my excitement is from the business that has been thrown off from banks that have gone away. I think also CRE, very often, especially in New York tends to be transactional in nature. Sometimes it comes with deposits, but it doesn't come with a lot of deposits. So that also my comment about trying to grow relationship-oriented business, which means credit and debit business, it's harder to do in CRE than it is in middle market C&I. So that's another reason why we're choosing more of the C&I side than CRE. Having said that, it's not that we're not doing CRE, we are. We're just not -- I don't think you'll see a lot of growth in CRE. You'll see some replacement, you'll see maybe a little bit of growth, but not -- I think you'll see more in C&I.
Yes, I would also add to Raj's comment and say that our overall perspective on CRE is one, that is a very disciplined approach from an asset allocation perspective. So while we're not seeing any shortages of phone calls in the New York market right now, it isn't a situation where we would deviate from the asset allocation strategy we have. And when we look at CRE across the footprint, we're obviously sitting in Florida with a very, very good demographic and economic scenario. We have now a CRE office in the Atlanta market. We have one in Dallas, we have one in demographics that are growing very strongly. So our discipline around what we do will be very important for us to continue and it will not be an opportunistic response to something just happening in one market.
That's great, thanks. And then just finally for me, when you look at that $1.8 billion of deposits that left were there any lending relationships tied to that or any specifically any lending relationships that require deposits? And if so, what's your -- what do you expect to do with those, would you call those loans, would you try to reduce that lending relationship, or is it really just the deposit side?
Yes. So of the 10, the two that I talk about separately, those are very strategic. We have the full relationship. We do everything for them. If we have a piece of the lending, not as big of course, lending because of our very small house limits, the loan numbers are much smaller than the deposit numbers. But on those two relationships we have the entire relationship, right. We have the lending, we have the cash rise in treasury, we have the entire back office is run out of BankUnited. So those are very core. The other eight, I think a couple of them where we do have small pieces of the lending side, we already actually told them that we will not be renewing because even the lending side, while it feels like, okay, we have the lending and the deposit side, it was more transactional in nature because there were just pieces of participation that we bought because we wanted to cement the relationship a little bit deeper. And now we realized it wasn't really helping. So the deposits are gone, the loans will be gone or if you already told them is it going to take out, if they're going to be nervous about the deposit relationship, we're going to be nervous about the credit relationship.
Yes. I would also add generally the ones that we stepped out of were unfunded participations that we got into to support the deposit relationships. So when there's nothing to support.
And Raj, with the two relationships, I know you mentioned this earlier, but just to reiterate, those deposits did not leave the bank. They just reduced spread their exposure around among more banks, those accounts are still here. Yes.
Okay. But on the -- those eight loans, though, it's more you won't renew them, it's not like you'll actually go and call loans that had deposit requirements?
We're just a participant in a much larger facility, and we just won't re-up that participation.
Okay, thank you.
Thank you. One moment for our next question. And that will come from the line of Brady Gailey with KBW. Your line is open.
Thanks, good morning guys.
Good morning Brady.
When I look at loan growth, commercial real estate is going to be flat, C&I growth is maybe offset with resi shrinkage, should we think about loans kind of being flat going forward so maybe loan and asset balances are kind of flat from here on out?
Yes, I would think so. Yes, for this year.
Yes. But you'll see an improved margin because of the shift from resi into C&I.
Okay. And then BankUnited has repurchased a lot of its stock over the last several years. I realize the uncertainty and the increased risk just in the banking system right now. So I totally get the pause there. But at the same time, your stock at 65% of tangible book value so when do you consider turning that buyback back on?
I think it will be a topic of discussion at every Board meeting over the course of the rest of the year. Starting in May, we will have a discussion. I don't think we're going to do anything in May. But at the August board meeting and the November Board meeting, this will be discussed. It is the prudent thing to do right now, given all the uncertainty around liquidity, around the economy, around even regulation for that matter. So when things settle down a little bit, we have a little clear line of sight then we will probably step back up. But I don't see that happening over the course of next month or two.
Alright. And then finally, if you look at profitability levels like ROA and return on tangible common equity, they remain fairly depressed. I know there's not much you can do about the net interest margin at this point. But is there an opportunity on the expense side to see some, I know you guys have done their cost reduction plan previously. Like is that something that is on the table that could help get the profitability of BankUnited up to peer levels?
Brady, our -- the lever that was going to move profitability more than any other is going to be revenue, not expenses. Margin is depressed given the makeup of the balance sheet right now. It's like I said, has gotten much more wholesale because of what has happened over the last two years or three years now. And that mix has to actually change to a higher performing mix. That is what will move the needle. I'm hesitant to say we will stop investing in the business, because if I go back and think hard about the mistakes that we made over the last couple of years or three years, one mistake was that during the pandemic, when we really didn't know where the world was headed, we pulled back and did not make investments in producers and revenue generators. Hired hardly anyone during 2020 into early part of 2021. And really, restarted the engine only last year. And that may feel good in the year you do it but you really pay a price long term, and I don't want to make that mistake again.
So you heard Tom talk about Dallas, we're moving forward. We did a client there last year. We're moving forward with that. We just picked up the team in Broward, we are about to pick up a team in New York. And yes, those are investments that they're not going to pay off immediately when you bring them on, but they're not very long-term investment. It doesn't take four or five years for those to pay off. So what may look like a bit of a drag for six months or so, within a year that should start producing revenue in excess of expenses. So I want to keep investing and really solve the profitability problem with remixing the balance sheet. And you need the right kind of producers to do that. You do need some time also, right. The resi is going to run off the way it's going to run off. It's -- CPRs are low at this point in time. But that is what will bring margin up, revenue up, ROA up rather than let me go. And listen, we are obviously squeezing the belt, don't get me wrong. We are doing that. We are looking at any kind of investment that can be -- that is very, very long term in nature and see if we can delay that. But on the revenue producer side, I just see there's an opportunity here that doesn't come up very often, and I don't want to miss that.
Okay, great, thanks guys.
Thank you. One moment for our next question. Our next question will come from the line of Stephen Scouten with Piper Sandler. Your line is open.
Hey, thanks guys. Appreciate it, good morning. I guess one question I had just on the funding side would be capacity for broker deposits. Can you give me a feel for how much -- and maybe that's in the slide deck, I apologize, but where -- what the level of capacity you guys would have from here to add those as needed?
Stephen, there is still capacity to add. I don't actually think we're going to need to do that in the short-term. I think we've got enough other types of deposits in the pipeline right now. But we certainly could add there another $500 million to $1 billion, but I don't think that will be necessary.
Okay. Great. And then can you give some color maybe about that marginal cost of deposits today, where you're seeing new deposits price and kind of what spreads that's leading to in respect to what you're able to book new loans of that as well?
Yes, it's a wide spectrum. So usually, when people ask the question they are asking about retail, and I'll tell you, retail is a little easier to answer. Right now, we have money markets priced at 3.50. And I'll say at 3.50, it's not getting much fraction. We have 12 months CDs priced at, I think, mid-4, 4.50, if I'm not wrong.
It might have gone to for…
[Multiple Speakers]
Yes. I think it's still 4.50 or 4.55, and so mid-4s and two year is slightly lower at low 4s. That's where -- and that sells. At 3.50 money market does not sell. I think you have to be a little bit higher, but we haven't been pushing that. And on the commercial side, it is a much wider spectrum. So we are engaging -- we're right now engaged with kind of a two-yard line with a complex treasury relationship, and it's going to be priced in the 2s. So -- but then there's other money that may be at 4%. So it's much wider in the title business, it's much lower. The book of business is still sitting at under 100 basis points. So it is a much bigger spectrum on the commercial side based on what you're selling and what is a complete package like. But on the consumer side, if you want to grow, those are the kind of numbers we're seeing. And our consumer business, as you know, is really Florida, not so much in New York. So that's indicative of where the Florida market is.
Got it. And new loan yields and kind of what sort of spreads you might be seeing, I guess, can you deliver like a 3% spread on new loan production?
Loan production is now getting into the SOFR plus 300 range, yes.
Okay, great. And then maybe just last thing for me. It sounds like the team in New York that you're looking to add is non-CRE focused presuming C&I focused. But I guess I'm curious if you'd also have additional interest in potential signature loan sales when those become available later this year?
Yes. We are familiar with that book, and I don't think we will have much interest.
The other thing I would say is we're really leaning away from credit only deals. We're really looking for relationship-based business where we're getting a fulsome relationship with the client. We're getting some operating deposits as well as the loan and really deemphasizing credit-only business.
Yes, makes a lot of sense. Okay, thank you very much for the color. Appreciate it.
Thank you. One moment for our next question. And that will come from the line of David Bishop with Hovde Group. Your line is open.
Yeah, good morning. Leslie, you mentioned the -- on the Federal Home Loan Bank side, there could be some maneuvering there, some restructuring. Just curious, maybe you can give us some color on maybe what might be contemplated there, are you going to maybe term that out or…?
I don't have a lot of details yet because we're still really analyzing and deciding what makes the most sense to do, but probably swapping some of it out, it makes more sense swap it out and determine out to get better pricing because of their term premium. But we're analyzing all of that right now, and I think we can bring the cost of that portfolio down, and I also am fairly optimistic about us being able to pay some of that down in the near term as well.
Got it. And then, Raj, in terms of the de-emphasis on the resi mortgage side there. Is that -- is that interest rate was positioning, just reducing as a percent of capital as it's gotten too big from that perspective, just curious at the pullback?
Yes. I think it's just too large a portfolio. I mean when you look at our mix of loans, I just made a comment about we took CRE down by $2 billion since the pandemic. Well, when you take something down, something else grows and it wasn't C&I. I mean C&I grew nicely, but it was resi because in 2020 and 2021, when the world was shut down, that was sort of the safest place that it felt that we needed to be. But now in 2023 standing here, I look at the mix of loans and I say, well, you got too heavy in resi, too heavy at securities, and we need to kind of remix this a little bit, which is what will help returns.
By the way, I just want to make a comment about the resi portfolio. It is a very high credit quality portfolio. And it also is not some a 30-year, 10-year I/O type portfolio. That's not what it is. It's very carefully constructed. There's a lot of arms. There is some 15-year paper, some 10-year paper, some 30-year paper as well and very little IOs. So our CPRs are -- while they're lower than historically, everyone is lower, they're not that low as some other banks are because of the hybrid portion of the portfolio. So it will run off. It will be very sensitive to interest rates. Interest rates go down even a little bit, you'll see more runoff. By the way, the Ginnie Mae portfolio is in that too. The portion of Ginnie Mae, which is not going to reperform, that's going to have a very short life because in a year or so, that gets foreclosed on and cash flows. So it's a nicely mixed portfolio, but we have just too much of it. And we need to reduce it and take it back to the levels that it was before the pandemic and replace it with more core business that generates not just good returns, but also good liabilities.
It's more a return question than an interest rate risk question. The interest rate risk is nicely balanced by the short duration bond portfolio.
Yes. Got it. Appreciate that color. One final question, Leslie, the preferred securities that you sold that drove the loss was that the entire exposure to those entities, just curious to get some color on that?
Closer to that issuer, it's not the entire preferred securities portfolio that was sold.
The preferred securities portfolio, the mark in that goes through the P&L every quarter. So yes, I'm sorry, go ahead.
Do you have the size of that portfolio?
What, I'm sorry.
The overall size of that portfolio.
Give us a second. Somebody is looking that up for me, we'll answer that question in a minute.
It's not as big as you…
It's not huge, but we'll answer the question in just a minute.
Okay, thanks.
We can move on, I will throw that -- I will just throw that in when I get it.
Okay, thank you. Our next question will come from the line of Brody Preston with UBS. Your line is open.
Hey, good morning everyone. Leslie, I just wanted to circle back on that one multifamily loan that went special mention, but has obviously paid off. Was that a New York City-based multifamily property?
No, it was actually in Florida. [Multiple Speakers]. We need to special mention this quarter and then it paid off. So it's gone.
It wasn't an individual loan. It was a loan in our institutional real estate group that was a fund investing in multi-families. It wasn't an individual property and it paid off.
Got it, okay. And I appreciated the stress test slide that you all included. I wanted to ask just a couple of questions about it. How does the -- I guess, like how does the probability of default and loss given default in these scenarios shake out versus what you guys consider in your baseline modeling?
I mean both are higher. I don't have the exact numbers in front of me, both the PD and the LGD are higher, obviously, in this scenario than they are in the baseline, but I don't have the PDs and LGDs in the stress scenario in front of me, I'm sorry.
Okay. No worries. And I guess I was just trying to -- I guess I was particularly curious of the hotel, the increase in the hotel losses like…?
Really just in a recessionary scenario, the kind of underlying assumption there is people just stop traveling and stop staying in hotels. So that's why you see the big spike in the hotel losses and some of that may be influenced by what happened in the pandemic. But yes, just the assumption there is that the business just drops off considerably and the NOI go down dramatically, recessionary scenario with the hotel portfolio that's what you're seeing there.
Got it, okay. And then...
Portfolio was very modest.
Well, I mean the total losses of that stress are $97 million, which I consider to be a bad quarter, but an extremely manageable number.
Understood. Leslie, just on the expenses, just wanted to clarify if the expense guidance that you gave last quarter for the full year was still intact.
Yes, I think we'll probably end up more towards the higher end of that guidance, but yes.
Okay. Okay. And then could you remind me -- two things, just the floating rate loan percentage that you all have and then the interest-bearing beta that you all are assuming when you do your sensitivity analysis?
Yes. First, let me throw in the answer to the question about the preferred securities. That's $69 million left in that portfolio segment. And those are not in the available-for-sale portfolio, like Raj said, they get mark-to-market every quarter. But it's $69 million at March 31st, and that sits at the holding company. Betas, the total deposit beta to date this cycle through the end of the quarter is about 43%. That's all in. That's about 62% for interest-bearing deposits, excluding CE including CD, it's 70 -- it's 45% all-in and 61 for the cycle. So that's where the betas are landing and somebody is getting me that floating rate portfolio information. So I'll throw that one in again as soon as it becomes available.
Got it. And then I just had two last ones. Just on the bigger deposit outflows that you called out, the 10 relationships, how much of that one point -- I think it was 1.9, how much of that was non-interest bearing?
[Multiple Speakers]
$1.9 billion on the top 10 customers who left, how much was interest bearing, how much noninterest bearing.
I do not have that in front of me.
Okay. And then the last one was more, Raj, for you on the ROA improvement, I heard you earlier about kind of remixing and it will take place over time. So I guess just as we think about where the loan-to-deposit ratio is right now, you're kind of pulling back on loan production, at least from a non-relationship perspective right now. I guess like what is your -- what is your long-term goal for the ROA, and I guess, when do we get there because it seems like it will probably take a couple of years just given the economic outlook and the fact that the securities portfolio is still relatively large.
Yes. It's a resi portfolio that will drive it more than the securities portfolio. Securities portfolio while it's large, it is 68% or 70% floating rate. It's the resi portfolio, which the runoff of that portfolio at current CPR rates is slow. That can change rapidly in a slightly different interest rate environment. So the speed with which we can remix will depend a little bit on that. And it's that remixing, which will cause the returns to get better. So I'm not trying to evade your question, but it really -- it's very hard to say when that will happen and how fast that will happen. It could happen relatively fast. Rates went up very fast. They could move down. I mean I know nobody is talking about risk moving down right now. [Multiple Speakers]. So yes, I mean, the goal is still 1% ROA and low double digits ROE and this model should get there. We expect it to get there. That's what we're driving for. But the time line is harder for me to say, your guess probably a couple of years is probably right.
Got it, thank you very much for taking my questions. Yeah, go ahead Leslie, sorry about that.
10% of the loan portfolio that's floating, the commercial loan portfolio, excluding Pinnacle and Bridge is 67% floating, including those at 61% floating.
Got it, thank you very much for taking my questions everyone. I appreciate it.
Thank you. One moment for our next question. And that will come from the line of Steven Alexopoulos with J.P. Morgan. Your line is open.
Hey, good morning everyone.
Good morning Mr. Alexopoulos.
Hi Leslie. I wanted to start, so going back to the $1.8 billion of outflows, can you just give us more color on where that money moved to and why you…?
Almost all of it went to your bank, Steven.
Well, let me say this, why couldn’t you make greater use of the insured deposit network because I would think that's lower cost than FHLB?
They were not interested. Their Board -- for the most part, their Boards made a major decision over the weekend to move all of their money out of midsized banks, not just out of BankUnited, and we had long conversations with these folks for the most part. Their Board decreed that all money would be moved out of midsized banks. And I believe when I looked at it, about 95% of it is now on your balance sheet Steven.
Because generally when we talk to the management team Steven they were supportive and open to the idea in the future, but they were not in a position to negotiate with their own Boards over this.
So that's really kind of what happened.
And what's your latest thought on where the mix of noninterest-bearing deposits bottoms?
Very hard to say. Very, very hard to say. I know you've been asking that question every quarter. Yes. I mean, it's holding at 49% and yes, probably be under some pressure. I can say confidently, it's not going back to what it was pre-pandemic, which was -- it's really hard to say is it going to 2028 or 2027 or where, but the Fed is hopefully coming to an end here. And while they'll probably pause and stay here for a while, at least it's not 75 basis points every time we turn around.
Yes, okay. And then -- so Raj, you've been working to improve the deposit quality, right, of the company for a couple of years now. I'm curious what lessons do you learn from what just unfolded, not just for you but for the whole industry and how does this change the go-forward strategy for the company?
Yes. I mean listen, some things we already knew, but we now know even more. And in that category, things such as smaller is beautiful, right. Small is better and large is not. So no home runs, only singles and doubles, right. We've been saying that for the last two years and achieving it, but we had a lot of work to do when we were holding on to this, what I would say, a crutch. The crutch got knocked out from under us and now we just have to stand on our own legs, which is all singles and doubles. That's one.
I think another learning in general, not just for the deposit side, I would say, is we always considered reputation risk as something to pay even more attention to them all the other risk that we own cyber and credit and liquidity and all that. But we always defined reputation risk as stuff that happens to us and bad press about us and monitoring BankUnited on social media and so on. What I learned through this is that guilt by association is something you also have to worry about a lot. The company, you keep so to say. We've agonized about this a lot, like what was that reaction on Monday, our business is so different from Silicon Valley and Signature and others that have very different businesses. There is some guilt by association. So, Silicon Valley we have little to no association with and didn't really hurt us. I would say, Signature did because there is a little bit of [indiscernible], now it's also creating the opportunity for us, by the way, but that's sort of after the fact.
So that was also a learning that you have to worry about your reputation, but also the company you keep and yield by association and getting caught up. I mean Steve, the number of negative articles I have read about the banking -- the regional banking business is enough to put me on some kind of an anti-depressive medication. It's like everything you read, every newspaper article, every time you hear somebody on CNBC, you're talking about there's no need for a regional bank. And I've saved these comments for my closing remarks, but let me just add right here, the darkest time for me in this was actually not that Monday, but it was maybe a week or two into this reading all these articles talking about that America doesn't need regional banks. And in that chaos, I actually got a phone call from a friend of mine who's a venture capitalist and who was a Silicon Valley Bank for 20 years and had moved all of his money and portfolio companies over to -- I won't say which bank, but you can guess one of the bigger banks. And two weeks had passed, and I asked him how were things, he said, I'm feeling much better, everything is in the safe place. And so sad to see what happened in Silicon Valley Bank.
But then he said, it's strange all the money that I have moved, I was trying to reach somebody in the bank the last couple of days, and they gave me an 800 number. I don't do 800 numbers, were his exact words. And we'll get used to it because that's how it works. He said, really, I had the phone number for my person at Silicon Valley and then he said to me would you mind if I introduce you to this person, and she has a team of about eight people, and they're wonderful. I said, I'm happy to be introduced to her, I'd love to talk to her. But we're not in that business. So I'm not sure that it will be very fruitful but that team is going to land somewhere. And that team looks after this person and other business like that in a way that larger banks cannot. Larger banks have a lot of benefits over us, a lot of advantages over our size and scale and brand recognition and so on. But the size and scale is what also gets in the way of closeness to customers. And for commercial customers, what matters more is not how many products you can offer, how big a check you can write and how many branches do you have. What matters more to middle market, commercial customers and small businesses is that I know somebody in the bank who is a decision maker. And then if something happens, I can always call someone and I know that I can reach someone with some authority.
That's just not possible at a large bank where the 30 levels of -- from where the customer touches the bank to where decisions are made. That is actually the most critical thing that a commercial customer looks for. And that's why regional banks exist. That's why we exist. That's why we take market share away every day. That's why we have a pipeline of business. So that is sort of to me, sort of personally speaking, that was my sort of inflection point in how depressing all of this was in March. After that phone call, after that realization I started getting out of this and started feeling good about, okay, this has happened. We'll deal with it. There is an opportunity that comes with it. We'll capitalize on it and we'll continue to keep building the bank. So now it's been a hell of a what it six, seven, eight weeks now.
Yes. Raj, if I could follow up on what you just said, so when we look at the results we're seeing from the industry, it's very clear that what you have in your slides, right, there was a week of outflows or a couple of days, and then it's pretty much back to normal, I know CNBC is going out of the way to convince everybody we're in a crisis. We're not. But the question is, do your customers still think we're at a crisis because they're watching CNBC or when you talk to them, do they feel like, okay, that was a storm, it's over, and it's pretty much back to business as usual now?
Yes. If I was to describe this, it was and try and draw comparisons to 2009, this felt like a tornado, 2009 felt like a hurricane. Hurricanes come to give you a little bit of a warning, they're headed your way. They sit on you for maybe two, three, four days, a long period of time to do a lot of widespread destruction. Tornados hit you with little to no notice, do a lot of disruption, but it's very localized and then they are gone. And that's what this feels like. It happened with little to no warning. I mean I didn't know that a week before that this was going to happen. I'm not sure anyone did. And it happened, it happened very fast, and it went back normal with clients not with CNBC, but with our clients, it went back to normal a week later. So we're still a little shell shocked to be honest. We're still worried is the tornado season could this happen again, is another one which might happen, which is normal. The building codes, i.e., regulations will change to make the structures, i.e., bank stronger going forward, and there'll be a price for that.
But there is a difference between what 2009 felt like and what this feels like. This was very, very sudden. 2009 was not very sudden. We saw that happen over all of 2008, starting in 2007 and then bottoming that in 2009 early. So it is a little different, clients aren't -- we're not showing them slides anymore. We showed them slides for about a week about how we're -- every bank was doing this, by the way. This is us. This is Silicon Valley Bank, and this is Signature and how we're different. That lie was used for about a week. And after that, it's no longer in any pitch book or anything that's been taken out. We're not talking about safety and soundness issues, we're talking about products and services and selling the way we were back in February.
And I'd also add, when you talk to clients, if you look at our target client, there's an entrepreneur running a $40 million plumbing supply company. They're actually not reading the Wall Street Journal and CNBC and they don't have a Bloomberg screen on their desk. They're running their business. They're not as panicky about these kinds of issues.
Thanks for taking all my questions. Appreciate the color.
Thank you. One moment for our next question. Our next question comes from the line of David Rochester with Compass Point. Your line is open.
Hey, good morning guys. Sorry to extend the call here, but just had a few follow-ups. I'll make it quick. On the expense side, I appreciated your comments about hitting the high end of that guidance range which I believe was mid to high single digits, so you're talking about a high single-digit growth pace. It looks like that implies a pretty decent step down in that quarterly run rate from here, I was hoping you could just maybe ballpark that for Q2?
Like Raj said, I think we're in the process -- we had that $4.4 million operational loss. That was pretty unusual for us. I don't expect anything like that to recur. We've actually never had anything like that in the past. That's going to be gone. As Raj said, we're also taking a pretty hard look right now at the expense base. While we don't want to sacrifice the investment we're making in teams of producers, we are taking a pretty hard look at the rest of the expense base right now and seeing that there's areas where we can pull back or push things out.
Okay. And then on the margin, I appreciated your 250 for the year comment. I was wondering if you had any rate cuts in that, and then in terms of the cadence, it sort of sounds like you're looking for maybe a little bit of a bigger step down in 2Q and then possibly stability from there, how are you thinking about that?
So we used the consensus forward curve and I think there are 225 basis point rate cuts baked into that later in the year. And yes, you're probably right about the cadence being lower in Q2 given the starting point.
Alright. And then on the deposits, I know the scenario you gave for the 250 is included. It's not only flat funding mix, I believe you said. But then you talked about the solid pipeline there on the deposit front, I know it can take a little while for some of those to pan out, but just wanted to get a sense of the size of that opportunity if you're talking about hundreds of millions or maybe billions, and then to the discussion earlier on the GDA mix, I was just curious what that component and the pipeline you're seeing right now?
Yes. I think on the guidance, that's just mathematically just to show you, we ran the numbers assuming everything is flat. That's -- we kind of made that a base case.
On the NIM guidance.
On the NIM guidance. The pipeline is about $1.5 billion to $2 billion in size. It's not going to happen all in one quarter. It will happen over the course of next two or three quarters. And like I said, it's all operating money. It's not any of the $1.8 billion that left. But it's not all DDA. It is operating money, but it's a mix of DDA and money market.
Maybe about 20% DDA here. And I would also say that $1.5 billion to $2 billion is pipeline that we have a really good line of sight into. There are more opportunities than that, but this is stuff that is really in the process of really in our sight line very specifically and granularly.
Yes. Alright, that's good to hear. And just to wrap up, Raj, your anecdote on the 800 number. We've heard a number of stories just like that post the crisis. So not to take any shots that other banks represented on the call today, but there are a lot of stories like that out there. So feel good about it.
Thank you.
Thank you. And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Raj Singh for any closing remarks.
I think we've taken enough of your time. We've had a rather long call, but thank you very much for joining us, and we'll talk to you again in 90 days. Bye.
Thank you for participating. This concludes today's program. You may now disconnect.