BankUnited, Inc. (BKU) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the BankUnited 2021 Second Quarter Earnings Call. [Operator Instructions] After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Susan Greenfield, Corporate Secretary. Please go ahead.

Thank you, Victor. Good morning and thank you for joining us today on our second quarter 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 the COVID-19 pandemic. The company does not undertake any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31st, 2020 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. Good morning, everyone. Thank you for joining us and giving us your time to listen to our earnings report. So for the quarter, our earnings - net income came in at $104 million, $1.11 per share, compared to $98.8 million or $1.06 per share last quarter. For the full - for the first six months of the year that this translates to an ROE of 13.2%, ROA of 115 basis points. We're very happy with where things came out on the earnings' front. NII, net interest income, continue to grow, despite, you know, tons and tons of liquidity on the balance sheet, which I think is a problem with every bank these days. Our NII came in at $198 million, last quarter it was $196 million, this quarter last year it was $190 million. NIM contracted a tiny bit from 2.39% to 2.37%, mostly because of that elevated level of liquidity just - that I just mentioned. The deposit front, again, a very strong quarter. Deposit cost came down, the mix improved, the volumes grew, so across the board, no matter how you measure it, the story of the deposit side was again very, very strong. So just quickly getting into the numbers. Our cost of deposits dropped from 33 basis points to 25 basis points in the last quarter, that's an 8 basis point reduction. The spot balances, DDA grew by $869 million. And most of our growth was DDA again. And by the way, DDA now stands at 31% of deposits for about, where it was 25% just at the end of last year. So for those of you who have followed our story for some time, you know, even as recently as a year or a year and a half ago, we used to think of 30% promised land, I'm happy to report more than 31%. But that doesn't mean that we're not shooting for a higher number. I think the bar just has been reset. And we think we can actually get the improvement of the funding mix even beyond this 31% that we're at today. Provision for credit losses came in at negative $27.5 million and lastly, we'll get into the specifics of how that all evolved. On the credit front, we, again lots of progress. Criticized and classified actually just dropped by $541 million, that's a 21% drop. Loans that were either temporary, deferred or modified into the CARES Act also declined. They were $762 million last quarter and now they gone for $497 million. Our NPL ratio however went up a little bit, from 1% of loans last quarter to 1.28%. If you exclude the guaranteed portion of SBA loans, that number is at 1.07%. This increase is attributable through - to largely attributable to basically one credit, it's a large credit, $69 million. It's a relationship with the C&I business here in Florida. It's a relationship they've had for almost a decade. And for large part of that decade for the first seven years or so, it was, we were the primary bank, all in the last two or three years that we become a participant in a shared national credit, because the company got so large that we couldn't really support them from the credit needs. So, one of the largest banks in the country took over the primary and we've been a participant, that's a company that we've known for a decade. Some accounting irregularities came up over the last few weeks in the books of this business, which is why we took for the stand of holding this to a non-performing loan and taking a large reserve against it. We have a $31 million - a $30 million reserve against this loan. Capital, by the way, net charge-off, this is due, financial of the credit side, net charge-off ratio was 24 basis points compared to 26 basis points for the full year of 2020. So fairly steady. Capital, as you know, you know we have tons of capital, we've announced of share buyback back in February, in which is still outstanding by $37.7 million and still outstanding, and that we are adding to that. And yesterday, the board met and approved another $150 million on top of what was already left in the last authorization. So, I think over the last couple of earnings calls, I've mentioned that the stand we've taken with buybacks is that we will be more optimistic rather than just steady by a little bit every day. And the reason for that is, we expect this to be a very volatile market. Even a little bit of bad news and good news can really move stock prices a lot, which is what we're seeing right now. So we're going to use that to our advantage and be optimistic. It's with the stocks trading and it's a fairly easy decision while it goes. CET1 capital - on capital 13.5%, HoldCo 15.1% at the bank. Our book value again continues to grow. Book value is $33.91 now, tangible is $33.08. So very happy about that - that gives progress upwards. This quarter offer, after I think the longest hiatus we've ever had. This quarter, we are back in the hiring business. And our product and producers both on the left and right side of the balance sheet across business, the base business line service is exciting, we've not done that for a full year, which like I said it was the longest we've ever gone without bringing in new producers. We even launched a new business line. We were always in this business either the HOA deposit business. We've always been in this business but not organized the separate business line. But we did that, it gives big opportunity. We've made a couple of hires, again, on the production side. And those hires will be starting soon. So very excited about what that business will do for us over the course of next three or four years. The other thing is, you know, this quarter - last quarter, excluding PPP loans, our loan growth was negative $500 million, round numbers. This quarter, we still have a negative number, but it's small compared to how much decline we had in loans last quarter. And as I look forward to where the pipeline is, I'm actually very optimistic about what third quarter and fourth quarter would bring to us, especially in the commercial side, especially in the C&I business. Let's on the CRE front, where the pipelines are also getting better, but C&I pipelines are much better. And Tom will get into all the details of this a little more. But as we see into the second half of the year, the best we can tell is, we will most likely make up the reduction that we've had in loans, again, excluding PPP loans, that's just a different animal. So the economy is healing both in New York and Florida, Florida is further ahead than New York like I said in the past, but even New York is showing very good signs. We are obviously watching how the healthcare numbers evolve, that can change at any time, so we do keep an eye on that very closely. But overall, it's been a very positive picture. We have opened up and brought our employees back in a calculated way. We're not completely back into the office. But by Labor Day, our goal is to get to the new normal, where a number of people who work in a hybrid fashion, others will work remote and some - a few will work permanently five days a week at the office. So all of those what we call art will return to office is be played out as we speak. And we expect that by Labor Day we will be in the new normal. Again, the caveat obviously is the healthcare numbers that we're watching. What else. I'm going to actually turn it over to Tom, who will get into a little more details. One more thing, which Leslie just pointed out to me. The other change on strategy that that is very recent over the last three months or so, it's for the first time in the history of the company, we are beginning to think about geographies outside of just New York and Florida. In the past, we've said, New York and Florida is about, you know, as much of the market as you want, because it's just hard, just you know flying back and forth between these two markets. But if the pandemic has taught us anything, is that, we don't have to fly back and forth all the time to cover two markets, if that's the case then there are other markets that will work well with our business model. They're generally business dense urban markets, where we are beginning to look at and have discussions with to see if you want to expand into these markets. There's nothing to announce, these are the very early phases, but I wanted to share at least on thinking about geographic expansion much before it actually happens. So when there is something a more concrete, of course we'll come talk to you about it. But we are beginning to at least think in those terms, that it's not just Miami and Manhattan but other markets might also get added to this franchise over time. But with that, I'll turn it over to Tom, who will walk you through a little more detail.

Great. Thanks, Raj. So let's talk a little bit about the deposit side. First, overall average non-interest bearing deposits grew by $673 million for the quarter and by $2.9 billion compared to the second quarter of 2020. On a period-end basis, non-interest bearing DDA as Raj said, grew by $869 million for the quarter, while total deposits grew by $877 million, NIDDA has now increased 26% on a year-to-date basis. So what's really good about that is, it's another quarter where we've seen really strong growth, you know, really at all of our business lines, it's a broad based support of the you know continuance of NIDDA, new relationships, most of the growth was driven by new logos coming into the organization, new treasury management relationships, which is showing up strongly in our fee income lines, which are up 31% in terms of service charges. So we're seeing good support at all of these areas. Time deposits declined by $806 million, money market and interest-bearing checking grew by a total of $815 million. So we're seeing some movement from time deposits to our money market product as we've lowered rates on the CD side, retention has been good and actually, as I said, a lot of this money has been moving to the money market accounts. On the loans side, I'll spend a little bit of time on this and follow-up on some of Raj's comments. While we did have a decline, excluding the PPP loan forgiveness by $56 million. In the quarter, it began to feel like a more normalized quarter you know residential growth was $494 million for the quarter, including both the residential and the EBO side. And I think most importantly, for us as an indicator, C&I loans were up by $186 million for the quarter, which is really, really a good sign for us. It's one of our major business lines, it's the first time that this line has grown in since the onset of the pandemic so that was really good to see. It also even better or just as good as $186 million. What was nice is, it was a good blend of new relationships into the bank, as well as existing clients increasing credit facilities during the quarter. So, you know utilization, line utilization has been, you know, a challenge for the industry, it's a challenge for us. We're at relatively low historic rates from a utilization perspective. So it was nice to see clients start to move back to a more normalized basis, see transactions being done in the quarter, see M&A activity being done in the quarter. So, the blend was good and we also within the C&I business, if we looked at the business, it was a strong back end of the quarter, June was particularly strong and we saw transactions in a number of different industries at one point, I looked at the pipeline for closing in June that we had something like 18 deals and all 18 were different industries. So that was nice to see from a diversity perspective. So given the pipeline activity that we're seeing now, we expect to see growth for the second half of the year. We will see a better commercial real estate, you know, environment we had $225 million of CRE run off to the multifamily business, now we're pretty much taper off at this point, as you can see from some of the supplemental information, you know, our multifamily New York portfolio has now been kind of reduced to what I would call a pretty stabilized level. This has been kind of a five-year process of this reduction. And I think now we're kind of at a stabilized level. The other thing it was good as Raj mentioned, you know, we've made a number of key hires, the HOA segment on the deposit side, we brought in producers on both sides of the balance sheet. You know, we've been a strong player in this market, and I think this is an opportunity for us to really significantly grow this business over the next few years. We also added capability to our healthcare practice team, which is important to us and we hired several commercial producers in kind of our - one of our core Florida C&I team so that the cadence and the feel, and it feels like it's starting to return to kind of a normalized basis for us from a business production calling perspective and whatnot. So a little update on the PPP. $438 million of first draw PPP loans were forgiven in Q2, at June 30th there was a total of $209 million of PPP loans outstanding over the first draw program at $283 million outstanding, and did the second draw program, forgiveness applications are a process for the majority of the first draw loan programs. And on Slide 8 in the deck provides more detail on this. A quick update on deferrals and CARE modifications. Slide 17 of the supplemental deck also provides some data on this. On the commercial side, only $3 million of commercial loans. Now it's short term deferral as of June 30th, $436 million of commercial loans were made on a modified terms under the CARES Act. The largest group of loans still under the CARES Act - is in the hotel portfolio, although the total CARES Act modified loans in that portfolio declined for $343 million at March 31st to $225 million at June 30th. We've seen particularly in Florida, we're about 76% of our hotel portfolio is, we've seen a pretty strong rebound in tourism. You know, in Florida, any of us that have tried to book hotel rooms in Florida, recently found it pretty difficult to do it, you know, at high rates and we're you know, we're seeing a strong rebound in occupancy, particularly travel related beachfront property occupancy within the overall Florida book. So you know that led to the significant decline that we had there, we expect to continue to see improvement in that. $218 million in commercial loans rolled off of deferral or modification this quarter. A 100% of these loans have either paid off or resumed regular payments. On the residential side, excluding the Ginnie Mae early buyout portfolio $59 million of the loans run short term deferral or had been modified under a longer term CARES Act repayment plan at June 30th. Of the $532 million in residential loans that were granted an initial payment deferral $493 million or 93% have rolled off. Of those that have rolled off, 93% of either paid off or making regular payments. Just some selected data on our CRE portfolio. Rent collections on commercial properties you know remain, you know, very strong when we look at our larger clients and selected data that we see in the office portfolio. Its rent collections have run 98% actually, both in Florida and New York, continued strong performance in multifamily, 96% in Florida and 91% in New York, retail collections were 95% in Florida, 85% in New York and we continue to see some improvement in the New York retail market. As I mentioned a little bit earlier, the Florida hotel market is particularly back stronger. All Florida and all New York properties are now open, occupancy averaging 75% for the second quarter of 2021, excluding one New York hotel that did not open until the end of the second quarter. So we're seeing a good overall rebound you know in that market. So with that, I'll turn it over to Leslie for some more detail of the quarter.

Thanks, Tom. So as Raj mentioned, NIM was down slightly this quarter to 2.37% from 2.39% in large part due to even stronger than anticipated headwinds from high levels of liquidity. Cash was elevated and liquidity was deployed into the bond portfolio, which while accretive to net interest income is not accretive to the margin. The yield on loans this quarter increased to 3.59% from 3.58% last quarter. Recognition of fees on PPP loans that were forgiven added 11 basis points to that loan yield this quarter compared to 6 basis points last quarter. So without the impact of PPP origination fees, the yield on loans would have declined by 4 basis points for the quarter, just due to the turnover of the portfolio into lower yielding assets in this environment. We have $9.8 million in deferred fees on PPP loans that remain to be recognized. $1.1 million of this relates to first draw - the first draw program and I would expect most of that to come into income in the third quarter and $8.7 million relates to the second draw program, and I really wouldn't expect to see much of any of that in the third quarter. The yield on securities declined from 1.73% to 1.56%, that was somewhat more than we had anticipated. Retrospective method accounting adjustments related to faster prepayments on mortgage-backed securities actually accounted for 10 basis points of that quarterly decline. And the rest of the decline obviously just attributable to turn over the portfolio in a slower rate environment. As Raj said, the cost of - total cost of deposits declined by 8 basis points quarter-over-quarter with the cost of interest-bearing deposits declining by 10 basis points with respective FHLB advances, there's still $1.1 billion of cash flow hedges against FHLB advances that are scheduled to mature over the remainder of 2021 with a weighted average rate of 2.4%. We estimate this, we talked about the impact on the NIM of higher levels of liquidity, we estimate that if we simply - if we normalize elevated cash balances, that accounts for about 8 basis points. So even if cash balances had been normalized, the NIM would have been 8 basis points higher. And we estimate that if we also normalize the level of securities, we would have seen 14 basis points, so that impact on NIM of high levels of liquidity is somewhere between 8 and 14 basis points depending on how you think about it. So pretty significant. As Raj said, we currently expect the cost of deposits to continue to decline next quarter, and we currently expect the NIM to be stable to slightly higher however, you know, liquidity may continue to be a headwind there. Moving on to the provision and the allowance. Overall, the provision for credit losses this quarter was a recovery of $27.5 million, Slides 10 through 12 of our deck provides some further details on the allowance for credit losses. The reserve declined from 95 basis points at March 31st to 77 basis points at June 30th. Biggest drivers of that change $19.4 million of the decrease related to the economic forecast. The largest impacts were improvement in the unemployment outlook and improving HPI and commercial property forecasts. The reserve decreased by $17.6 million due to net charge-offs and the $16.2 million due to portfolio changes that bucket includes things like the net decrease in loans shifted into portfolio segments with lower expected loss rates such as residential, as well as the impact of just the loans moving in and out of the portfolio and improving borrower and financial statements for us. $12.8 million decrease in the amount of qualitative overlays that had related to some uncertainties around the COVID pandemic that we - that seem to be resolving themselves, and an increase of $20.7 million related to risk rating migration. Most of that was the $27.2 million increase in the reserve related to the $169 million commercial relationship that Raj spoke about bringing that reserve up to $30 million. The largest component of the reduction, the reserve was the CRE portfolio, because that model is particularly sensitive to unemployment and property forecasts. Similarly we saw a reduction in the residential allowance, again related to improving unemployment and HPI. The C&I reserve actually increased this quarter on a - you know the loss rate basis and that was again due to this large reserve on the one loan. Total criticized and classified loans declined by $541 million, special mentioned down by $282 million and substandard accruing down by $299 million, substandard non-accruing loans increased by $40 million again back to that one commercial loan that we've been talking about. Couple notes on other income and expense. With respect to operating expenses we saw a decline in comp this quarter as expected, Q1 is always somewhat elevated. Deposit insurance expense came down correlating to the reduction in criticized and classified assets. We continue to see increases in deposit service charges and fees stemming from our treasury management solutions initiatives that we initiated in conjunction with BankUnited 2.0. One more thing I just want to mention real quick. With respect to the tax rate, I would expect it to remain around 26%. Consistent with the uncertain tax positions disclosure we made in our last 10-K, we have very recently entered into discussions with the State of Florida regarding several outstanding tax matters, there's a possibility that these discussions could result in recognition of a benefit somewhere in the next few quarters. These discussions have just recently gotten underway. So it's too soon for me to be much more specific than that. So with that, I'm going to turn it over to Raj for some closing comments.

While Leslie was talking, I just looked up on my deposit report, which I get every day. So as of last night, our deposit costs was at 20 basis points. So I feel pretty comfortable of saying that we will be in the teens this quarter, might be in the teens as early as next week. So I know in the past I've said that we think we will end the year on a spot basis in the teens. I'm happy to say that we're about five months ahead of schedule. And by the way, deposits continue to grow. Truth be told you know while I'm very excited about deposit growth that has come in, liquidity is a problem. So, this would have been an even better report, if we accept to you that we actually kept deposits flat. So we're trying to you know, and we are feeling pushing out anything that we think is quite sensitive that will hurt us in the future when rates rise. So you know, good thing to increase the quality of the book, because someday rates will rise. So it is you know, if I look back six months ago, when we thought that you know would play itself out and overall of the deposit side, we're much further ahead of what we thought we could do this year. On the loan front, we're further behind than what we thought we could do. But and I think about standing here for the next six months, I still see a lot of good news on the on the deposit front, because I find there's still good money still coming in and cost on this still declining further than we ever thought it would. And on the loans side, pipelines are now beginning to look normal. So also a point that Tom made that I just want to repeat that may have gotten lost, multifamily in New York has been the big headwind for us. The runoff from that portfolio has been a big headwind for us, because exactly five years ago was when we changed strategy, and he emphasized multifamily that five year anniversary is literally around you know maybe I think it's this month. So as that portfolio matures, and those payoffs and sort of accruals runoff, it's behind us. As I look forward, we don't see the same velocity of payoffs happening, because that portfolio is kind of getting you know to a normalized place. So that is also from our payoff perspective, a good story and I look forward over the next couple of quarters compared to the last couple over the last - on this last couple of quarters for the last five years. So I just wanted to make that point. But we will turn it over to the moderator for questions.

[indiscernible]

Yes. Okay, we'll take questions.

[Operator Instructions] Our first question come from the line of Ben Gerlinger from Hovde Group. You may begin.

Hey, good morning, everyone.

Good morning, Ben.

I was wondering if we can start on Slide 23, it's the non-performing loans. A big uptick, I totally understand is that one major C&I credit. But if you back that out, when quarter looks to be roughly flat. And as Tom worked through the credit information, it seems like everything is not only positive, but it's working in the right direction as well. So I was curious if you could shed some more color on non-performing loan balances in general, and then also the credit that you guys called out. It seems to be $30 million. You said $30 million reserve. It seems to be pretty high as a percentage of reserve relative to the total loan. I was just curious if you can shed some color on the confidence there in terms of that this SNIC and performing going forward.

Yeah. On that loan, we are still capturing a lot of information. We'll actually know a lot more in about two weeks' time about exactly the collateral coverage we will have evaluating all the collateral there. So that was our best guess. And obviously, we can do a lot going back and keep doing this over and over again. So we just took what we found with a conservative and appropriate level of reserve. But we'll know a lot more in about two weeks' time. This all kind of played itself out over the last few weeks, whenever you have, you know, accounting irregularities, it becomes much harder to understand sort of the extent of the problem that might be, because you can't really rely on the numbers that have been presented to you. So that's, you know, it almost, you know, falls outside of credit losses, it become more like a fraud loss. So that's what we're dealing with here. It's not like a business slowdown and we saw this slowly happening, and we get to kind of predict how it will come back up. It's just suddenly the numbers of human relying on are to what the paper they're written on. That's the situation we're dealing with. So we're valuing collateral, we think we made appropriate conservative estimate of what the reserve needs to be. But we'll know a lot more, like I said, in a couple of weeks and it'll work really well for the coming quarter.

Yeah, with respect to the rest of the population, this is a - for the most part. I mean, there have been some small ins and outs. But for most - the most part for the last few quarters, this has been a relatively stagnant population of loans that are in our workout recovery department, and you know, just working through them. So other than this one loan that Raj just mentioned, there's a little ins and outs, but for the most part, this is just the population of loans that we've been working out for the last few quarters and you know we are hopeful that we'll see that gradually start to wind down.

Yeah. There's nothing really stands out on this one -

No, no.

Okay, great. That's really helpful color. And then if we could just kind of switch gears here, Raj you seem pretty optimistic in terms of the loan growth, I get that you've transitioned from a giant question mark at the beginning of the year to being in a sense of positivity, and now you guys are taking the offensive approach of hiring lenders and looking outside your markets. I was curious if you can kind of maybe potentially frame what your loan growth targets might be in terms of the end of this year or even a year from now. Any sort of areas you may want to grow and growth in general, what do you think would be a good mark to have in terms of growth?

Yeah. So for this year, I mean, look at the trajectory over the first quarter, we were down $0.5 billion, this quarter we're down about roughly $50 million. And by the way, the quarter had closed one day earlier, without having doubt we had payoffs from the very last day, which really - which is annoying when that happens, but we did have unexpected payoffs in the last day, we were actually going to have a positive border. But nevertheless, the first two quarters have been negative quarters, I'm expecting the next two to be positive quarters. In the past, we've said we'll probably have, you know, very low single digit sort of you know percent growth, which is kind of what it still feels like. It is hard to predict in this environment, it is not a normal environment yet, I would not even dare try what things you know, to predict what the next year would be like. I think we need to see things settle down a little more. But just for this quarter, I expect the next quarter - third quarter, fourth quarter to be positive. And for us to kind of make up for what we have lost in terms of balances over the first two quarters. I mean, that's my optimism comes really from seeing the environment, but more importantly, seeing the pipeline. So you know, when I sit down with Tom every couple of weeks, I used to look at whether especially the commercial C&I pipelines are that's - that you know they're at the best place they've been since the pandemic started. And line utilization while it's still low. It has been improving. The bottom was February, end of February was the lowest that our line utilization was, it has increased slowly but surely every single month, with the exception of June in the last year of June when we had some pay downs when it went down a little bit, but overall the trajectory is pretty healthy and all we need in our forecast is our forecast doesn't say it will go back to normal by the end of the year. It just says it'll go back to halfway to normal. And if that happens, we will have a decent second half.

Yeah, I might add that's one of the reasons why I made the comment about where our production came in the second quarter which is, you know, there are things that we proactively control which is new relationships calling, you know, bringing in new clients into the bank. And I think when we look at the pipelines coming from that activity, it looks pretty good right now. The point that we don't control is the line utilization of existing clients. But the fact that we saw, you know, a good portion of our production coming you know from line increases during the quarter, clients doing new transactions, you know, while the utilization didn't move much because of some of these pay downs that Raj mentioned, that we had at the end of the quarter. The overall feeling and sentiment about clients doing more activity, seeing more activity, revenue starting to go up, a lot of our credit facilities are formula-based facilities. So as sales goes, receivables go up, inventory goes up and you're going to, we would expect to start to see, you know, as the economy continues to recover, you know, more line utilization. So if we get both of those going in the same direction, at the same time then I think that's going to be a much better story.

Great. That's really helpful. If I can just sneak one more in Leslie. I know expenses has always been a little bit volatile, especially with comp and other moving pieces. Outside of technology spend, which I get that is an important investment for the bank. Is this kind of 118.5's a good run rate or should we expect something a little bit higher going forward?

I would say over time that's probably going to creep up a little bit, you know, Tom and Raj, both referred to you know, hiring we're doing and some producers do I think that's going to materially move the needle on that run rate in the near-term? No. But we are seeing that however on the flip side, that should also lead to more than that much you know these people that are on the paper, they're not going to be here long. So that should lead to an increase in revenue offsetting it. But I would say there is going to be a little bit of upward pressure on cost because we are actively hiring. And I think the other thing that's going on in the comp number right now are our variable compensation accruals have been increased over the prior year, again, in anticipation of a strong second half and a pickup in revenue. So that's actually great news.

Okay, great. I appreciate the color guys.

Yeah.

Our next question comes from the line of Jared Shaw from Wells Fargo Securities. You may begin.

Hey, good morning, everybody.

Hey, Jared.

Good morning.

Maybe sticking with the loan growth outlook. You know, that's good optimism there. I mean is that - on the C&I side. Is that really just more broad based with being able to start to penetrate those new customers to the bank that you brought in on the deposit side? Or are there certain industries that you're seeing more strength, you know, whether it's, you know, franchise finance or you know, whatever? You know I guess maybe a little color on what you're seeing in the pipeline there and -

For sure. I mean we're still careful in from a credit perspective, we have not increased our risk appetite for credit. We're still being cautious on that front. But it's mostly coming from a very healthy economy in Florida, especially, and also rebounding economy in New York, which is just a few months behind. But now that's - it's not like, you know, we just found our deposit block or we're not selling that, you know, a credit product. It's more coming from the fact that there is - the economy is rebounding very strongly in Florida. And we are sort of benefiting from that and harvesting the, you know the good news over there.

Yeah, I would say it's pretty broad-based like I referred earlier when I looked at the closing production for the quarter. There were no two deals in the same industry. So it ranged from a you know, a multinational company in Orlando that manufactures toilet paper to our, you know, renewable energy to you know, communications to health cares. It was a broad number of industries across the board and the segments that we serve.

Okay. And then on the HOA business you know, it sounds like that's primarily or exclusively deposit right now. Is there an opportunity to have that become a lending product in conjunction with that expansion?

Yeah, there is a small element of credit in that business. But and that's not really what the business is about. Credit does generally you know, if you do a 10% local demand that that's probably a high number, it really is a deposit business. And I want to clarify, we have been in that business for a while, but it was just never really, you know, organized the separate line of business or for some line of business. So we're putting some resources behind it, we're going to spend some money on technology, and then we'll go to market, an international business for us actually, because while we do a lot of it in New York and Florida, we do have clients outside. So, more recently some banks have actually stepped up and bought platforms, spent tons and tons of money on goodwill and intangible, you know, we think we can grow that organically without spending that kind of a capital.

You know the production teams that we've hired in terms of new people have a national footprint in terms of their [indiscernible].

Okay. And that, you know, when you talk Raj about looking at other geographies as being potentially attractive, how should we think about BankUnited entering any of those? Would that be you know, if you come across a person or a team that has some good relationships in the market, you would do that or to be a bigger, you know, a, once you identify a market, it would be a bigger entrance with potentially a branch or potentially an acquisition or you know, a bigger splash than just one or two people?

Yeah. You know, first of all, look at the way we've entered other businesses, other geographies over the last 10 years, chances are, it will be similar to that, which is going to be a small, separate a new geography with a small team, and then slowly grow it over time. Acquisitions is always possible. But it's never our primary strategy, we always tried to find ways to do it ourselves. And we can't there's something so special that you have to acquire it, then we're open to that too. But our history will tell you that that's not something we lead with the obviously, organic growth. So we are, it has to be a market that makes sense for us, it has to be a healthy market, it has to be a market where our business model would work. Not every market is like that. It's unlikely it will be far flung is not going to go to Seattle was an example. But it'll be somewhere you know within maybe let's say the eastern seaboard. So we are looking at markets from Boston all the way down to Atlanta and beginning to engage with teams to see where we could actually get, you know, what's the health of these markets? What is the health of the lending markets? And you know, what are the pricing dynamics? They're quite different from one and let's say to the other? What is the competition like? And then, most importantly, you know, can you find likeminded people who would work well in our family?

Great. And then maybe just finally for me for Leslie, you know, the securities portfolio went up about $1 billion this quarter. Can you give any detail around you know what the purchase, yields and duration was like, and is that, you know, changing the overall interest rate sensitivity at all for the bank?

So the purchase yields are depressing that they are what they are, they're averaged just under 1% for the quarter. The composition of the portfolio is not changed materially because of the purchase activity. And we've made a conscious decision to keep the duration of the portfolio short, you know, Jared, it always has been. We don't believe that this is the time to take duration. So we're still you know, we're keeping the duration of the portfolio short.

Yeah, thanks -

The bond portfolio is probably a little larger than we'd ideally like it to be right now. But it's better than letting it sit at the Fed, earning 15 basis points so.

Great, thank you.

Our next question comes from the line of Dave Rochester from Compass Point. You may begin.

Hey, good morning, guys.

Good morning, Dave.

Wanted to go back to the loan trajectory for a minute. Appreciated all the color there, you know you'll definitely get some nice lifts with that multifamily runoff going away. But you've also had some decent runoff in the bridge book as well. That was another I think, $100 million on top of the $250 million for multifamily this quarter? So just wanted to get your take on how you see that book trending and when you think you'll hit bottom there?

Yeah, I would say I'd split the answer to that into two pieces. One is the equipment piece and the other is the franchise finance piece. So if - I'll take franchise first that ended the quarter at about $463 million. We will probably continue to prove that a bit and take out concepts that we don't think are the long-term rate concepts in that business and I would expect that to trend down a bit over the next couple of quarters. We do see some new transactional opportunity, you know, in that we're looking at four or five deals right now in our McDonald's focus that I think are good looking deals. So that will probably drift down, but then stabilize, as we get to the end of the year. We've got a couple of more concepts that we might want to clean up a little bit. And we will probably continue to reduce one of the fitness concepts a little bit where there are sale opportunities or, you know, there are some transactional volume going on in the fitness work where you see some aggregation of operators in that area. On the equipment side, I think that will also continue to trend down just a little bit. There is not as much transactional opportunity in the equipment finance area right now, we're not seeing as much return for stronger CapEx type spending there. And frankly, you know, right now, the deals that we're seeing are fairly long duration opportunities. So they're like fairly fed rates. And so it doesn't you know give us sort of great economies as we look at the tradeoff between credit risk and return and like in other businesses that were in. The tech, you know, sub 2% type risk for 10 years, and then past level credits doesn't make an awful lot of sense right now. And I think we'll just, you know, we'll see growth in other areas of the portfolio that have got better returns and come with deposits and treasury opportunities and things of that nature.

Yeah. Okay. So you've got one offs of siding in bridge, you've got the multifamily portfolio basically stabilizing it sounds like in 3Q. So it seems like -

Still be down a little bit. 3Q still -

Down a little bit, okay.

The rate of decline will slow considerably.

But it just seems like you know, with, to your point, the rate of decline slowing pretty significantly and your positive commentary on the pipelines and growth in other areas, it seems like you guys are poised for some pretty decent loan growth here in the back half of the year. Is that - is that fair?

Yeah.

Yeah.

Yeah. Good. Just switching to capital, it sounds like you're perhaps about to get aggressive here, just given where the stock is trading as the buyback as far as that goes. So if you end up wrapping this up in the shorter-term, do you see more excess capital behind that? And would there be a willingness on your part to put out another plan? Not trying to get too far ahead here, but just wanted to understand how you think about excess capital right now?

Yes, we will read back most like that and obviously the board will make the decision. But there's a lot of excess capital here. I can see us doing another [150] [ph] right after that.

Right. And then maybe just switching to your, the securities investment strategy. How are you thinking about growing the book now, just given the newer and lower rate environment that we're in at this point, if you end up getting more excess deposits in the back half the year?

So obviously, we see stronger loan growth on the horizon. And you know, it would be our desire that we would not be growing the securities book from here, but that, you know, growth on the balance sheet would be, we'd be seeing growth in the loan book instead of the securities book. And as Raj mentioned earlier, we are also in the process of actively incentivizing depositors who we believe will be rate sensitive in a different rate environment to take their deposits elsewhere. So we would not be disappointed if we didn't see total deposits grow next quarter, we want to see NIDDA grow. So I would, you know, my desire would be, that we don't see the securities but grow materially next quarter. However, to be honest, if we find ourselves in the same position, we're in this quarter where we have a lot of excess liquidity there, that's where we'll put it.

Listen. If deposits were declined by $1 billion dollars, let's say.

Yeah.

And we, you know, just reduce cash on the other side of the balance sheet. You are not going to lose any earnings, but you'll free up $80 million of capital -

Additional capital -

Which you could buy back stock and you know, what are we trading at? 1.2, 1.3 times book actually accretive to EPS.

Yeah.

So you know, I wouldn't be concerned if we end up a you know -

Of a balance sheet yeah -

A balance sheet would be a good thing.

Yeah.

Yeah, yeah.

Exactly.

Sounds good. Maybe just one last one on the fee side. I saw the bump up in lease financing revenue this quarter. And I know that can bounce around a little bit. But are you finally expecting that the decline that we've seen over the past several quarters to have this subsided here and maybe stabilized going forward or do you still see some -

My best estimate, Dave at this point is that it's pretty much stabilized for the foreseeable future.

Great. All right. Thank you very much. Appreciate it.

Yeah.

Thank you.

Our next question comes from the line of Brady Gailey from GBW [sic - KBW]. You may begin.

Yeah, from KBW. Thanks. Good morning, guys.

Brady, he thought you switched firm.

Still here. I wanted to ask just another one on the C&I non-performing. What sector was that? And then when you look at your total loan portfolio, can you remind us what the percentage of total loans that are sure national credits?

The sector, this is and is retail and wholesale distribution of commercials of heavy construction equipment in largely the southeast part of the country. And while technically this falls under a SNIC category, I wouldn't really call it that. We have deposit relationship here, we were the primary bank for the longest time and only because of the size of this thing growing to a place that we did not want to go. This became sort of a club deal. Overall, the deal was large enough, but this has to be called a SNIC. But this is not one of your typical SNICs where -

Was in the capital markets transaction.

Right. This wasn't like you know, a large money central bank calls 17 banks and says, who wants to take this $20 million deal. This was somebody - this is a business and a company we've known and bank for a long time. So, which is why it's you know even more painful to see this go the way that's gone.

Yeah, the definition of a SNIC is over $100 million in total credit commitment in three or more banks. So I mean, it's not, as Raj said, this is a [technical difficulty] you know multibillion dollar deal where you have 28 banks and it's really a club deal.

Yeah. Unfortunately, we have a longstanding relationship with this company like Raj said, that makes us even more painful.

Yep.

Yeah, okay. And then you know, Raj you mentioned your back on office you're hiring people. Can you maybe size out how many people you hired in the second quarter? And maybe just talk about you know how many people you could hire going forward?

I couldn't answer the second part of the question. Because it's, you know it's always ad hoc, how many people you'll be able to bring on when we are having multiple discussions? Tom, do you remember how many we've hired?

I would say, it's probably about six or seven.

Yeah.

Okay. And then last -

Said the future hire is also, you know, a very opportunistic issue. I mean, if we find a terrific producer at a market, you know, whether we have an opening or not, we're going to hire them. I mean, we're in the hunt for talent every day.

Yeah, that makes sense. And then Leslie, you know, I heard you have $9.8 million of PPP fees left. Can you tell us how many PPP fees were actually taken in the second quarter? The dollar amount?

Yeah, $4.5 million, Brady.

Great. Thank you all.

And our next question comes from the line of David Bishop from Seaport Research. You may begin.

Yeah. Good morning.

Good morning, Dave.

Leslie, a quick question for you. Just in terms of quarter-to-quarter change, just curious how the balance sheet looks from an interest rate sensitivity position, just curious if you have that updated relative to last quarter?

Not much different, not much different, Dave, the balance sheet has been for some time and continues to be moderately asset sensitive. It's probably a little bit more asset sensitive now than it was a quarter ago, but fill in the same range. And that's kind of what we try to manage too.

And in terms of, I guess, loan floors, just curious get a sense in terms of how much we have to see rates rise before we start seeing some of these loans coming through their floors is it a big impediment in terms of repricing?

It's not a big impediment. Tom, correct me if I'm wrong, but I think the only book where we have really meaningful operative floors right now is the mortgage warehouse book, but the rest of the book has some floors, but they're pretty low.

Correct.

Got it. And then Raj in terms of maybe a high level commentary. You mentioned that the runoff I guess in the New York multifamily is probably nearing an end point here, a broader view of that as an asset class here, do you think that will eventually begin to grow again, and maybe just your view of just New York multifamily in general at this point?

I mean, it's a very wholesale, you have asset class. And it's very hard to generate deposits and you would think it would be easier than it really is. And we did so to compete with some banks that, you know for them that's the only asset class, which makes it hard you know to compete with. It is, overall, the New York market obviously had suffered more in this downturn than that's in Florida, which also you know applies to this asset class. So, I'm still not very bullish on New York multifamily asset class, I would not want it to grow, at least not very meaningfully, what we will be left with our core relationships where we have deposits, we have entire relationship, and not just loans that we, you know, bought from a broker, so if we can grow that business, of course, we would want to grow it, but you know, it is such a wholesale broker-driven industry, that to have real sort of substantive growth, you know, measured in billions of dollars, you really have to go through the broker channel and really think of this as almost buying bonds, that's the only way you can really get a lot of growth. So I don't suspect that we will end up with a lot of growth in the New York multifamily. But I will always have it as an asset class and stable in the current form than it is right now.

Yeah, I would also add that even prior to the pandemic, the regulatory changes that went through, you know, recently a year and a half ago or so in New York, it dramatically changed the economics of the business.

The long-term economics are, you know, these are five-year loans for the most part. So if you go out and say, Okay, what is the cash flow projections going to be five years out, based on those changes that happened just before that pandemic that you know, those debt service coverage ratios will look only 10 or five years out. So that is a concern that we never used to have in you know, multifamily, but now, it's something you got to put into your math.

You know, operating expenses in that business are just growing faster than our rent rolls can grow. And therefore, there's just compression in NOI.

Got it. And then maybe, lastly turning back to credit, obviously, you know, the improvement in the economic forecast, you know, driving the lower ACL ratio, just curious when things do start to bottom out in terms of, you know, in terms of having to provide for loan growth, just curious where you see yourself maybe preserving at from a percent of loans perspective moving ahead?

Before the pandemic hit, right, what was our CECL coverage ratio?

60 basis points. And so I would say, you know, Dave, and I've said this before, these kinds of things are difficult at best to predict with a high degree of precision. But I would say, you know, we see the economy really close to what it looked like when we put that day one CECL reserve on if portfolio composition is consistent with where we were, then I would say we're going to drift back to that 60 basis point level. Right now, the portfolio composition is a little more tilted toward residential than it was then which carries a lower reserve. So, you know, even with more commercial origination heading back there probably makes as much sense to me as anything. Can I say definitively when we get there? No, because some of that also depends on continued upward risk rating migration, the nature of production, believe me, I would be very pleased to get back to a place where we have a positive provision in a quarter because of loan growth. That would be a good thing. But I think you know, my best, the best way to look at it is probably we're headed back towards that 60 basis point, barring things looking - going in a different direction economically.

Got it. Appreciate the color.

Thank you. [Operator Instructions] And I'm not showing any further questions in the queue at this moment. I'd like to turn the call back over to Mr. Raj Singh for any closing remarks.

Thank you, everyone for joining us and listening to our story. We'll talk to you again in three months. Stay safe. Bye.

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