BankUnited Inc (BKU) 2024 Q2 法說會逐字稿

Good morning, and thank you for joining us today for BankUnited, Inc., second quarter 2024 results conference call.

On the call this morning are Raj Singh, Chairman, President and CEO, Leslie Lunak, Chief Financial Officer, and Tom Cornish, 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.

They reflect the company's current views with respect to, among other things, future events and financial performance.

Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries are 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.

Thta the future plans, estimates or expectations contemplated by the company will be achieved.

Such forward-looking statements are subject to various risks and uncertainties and assumptions, including without limitations those relating to the company's operations, financial result, financial condition, business prospects, growth strategy and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry.

The company does not undertake any obligation to publicly update or review any forward-looking 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, 2023, and any subsequent quarterly report on Form 10-Q, our current report on Form eight Q -- 8-K, which are available at the SEC's website, www.sec.gov.

With them, I'd like to now turn the call over to Mr. Raj Singh.

Thank you.

Welcome, everyone, to our earnings call.

Thank you for joining us.

I'll start off by saying this really has been an outstanding quarter.

There's always some variability on how things will end when you're coming towards the end of the quarter and sometimes things fall your way, sometimes they don't this quarter.

I think everything fell our way whether you look at loans, deposits and IDBA where do you look at cost of deposits, margin and expenses, credit, capital, liquidity, I mean, I really couldn't have asked for a better end to the quarter.

And just as we were celebrating, of course, India won the World Cup on the last day of the quarter.

So like I said, I really couldn't have asked for more.

I still haven't stopped celebrating.

So thank you, team India, for making my day.

Let me quickly go into the numbers, and I'll highlight a few and then Tom and Leslie will jump in with more details.

Just to highlight, of course, EPS came in at $0.72. I think I checked a couple of days ago.

Consensus was around $0.65. The margin as we've been telling you for some time that we expect margin to grow, which I did very nicely.

I think last quarter we were at 2.57% were up 2.72% this quarter.

So very happy about that.

That margin grow simply because we are being we are seeing success at transforming the balance sheet, both on the left and right side of the ledger here.

So talking of the right-side first deposit deposit cost actually came down for the first time.

So last quarter, we told you were kind of getting to the place where deposit costs will not grow.

Happy to report that actually we dropped deposit costs from 3.18% down to 3.09%, if you peel the onion back a little bit more, a lot of that drop really came up, not all of the drop came from DDA growth, which was phenomenal this quarter.

But if you look at interest-bearing deposit costs, while they were up a little bit from 4.21% to 4.26%, it's also beginning to plateau out last quarter, by the way, they were up 17 basis points this quarter, up only 5 basis points.

But overall deposit costs were down from 3.18% to 3.09%.

We're very happy about that.

Deposit growth, which is the big story here, non-brokered deposits grew by $1.3 billion this quarter and off that $1.3 billion, $826 million was non-interest DDA, which is so very, very solid number.

That's, by the way on top of a pretty solid DDA growth that we had in the previous quarter as well.

I think for the first half of the year IDDA is up $1.2 billion.

So that transformation that I'm talking about to the right side of the balance sheet is well underway.

But of course, the job is not done.

We're going to keep at it and keep improving the deposit mix.

We did take this opportunity to pay down more of the brokered than we had originally planned.

So net of pay-down in brokered, our deposit growth was $736 million.

If you look at wholesale funding and who define wholesale funding as brokered and FHLB combined, we've brought that down by $1.2 billion this quarter.

I had Lastly, just yesterday I looked at this, where was this wholesale funding a year ago or a year and a half ago?

And when were we at this level or lower, you really have to go back to the beginning of this rate cycle.

So early 2022, to see numbers as low as this, despite the fact that we're still at 5.5% Fed funds rate.

We've taken our wholesale funding down all the way back to when the Fed was at 0%.

So that's that's quite a achievement in a short period of time.

Basically in the last year.

Asset mix also improved just as we had been guiding to while revenue declined by $212 million.

Our corporate business commercial business small business, CRE, everything grew.

And if you combine all of that, the growth was $589 million in those categories Leslie, like I said, declined a little over 200 and leasing business continued to run off as it has been for several quarters now.

Overall credit strength, trends are still solid.

Actually, this is the first quarter in some time where our criticized and classifieds declined just a little bit, but we've been proactive in risk rating the credit down over the last few quarters.

So this quarter, actually the trend went the other way just a little bit.

There was some migration in office CRE.

We actually had NPS go up a little bit of the most notable are two loans in office CRE, which amount to about $50 million, one in New York, one in Florida, but we're fully reserved for this.

And now this came as a surprise, we've been tracking this for quite some time and feel pretty good about the reserves that we've already taken on these loans.

In terms of Leslie will talk more to you about expenses, but even in fee income, I just wanted to point out that we've been making investments over the course of last couple of years that have not been very noticeable, but they're beginning to now pop up.

We're having good success with commercial card.

We're having good success with capital markets products, stuff that we've launched over the course of last couple of years and the numbers are beginning to be noticeable, and I'm very happy about that and a big shout out to the teams who work on this over the last two years.

Capital liquidity are all robust.

Tangible book value continues to grow.

The mark on the bond portfolio continues to come down.

So like I said, nothing but good news.

And I'm very happy with how things turned out.

In terms of guidance, not much in terms of, we're not changing strategies midyear.

We've got to keep our heads down and keep delivering DDA growth is still the most important thing for the success of the company.

Let me just take a minute to mention the $1.2 billion of growth that we've had in DDA.

A large part of this has come from bringing in new customers.

This is this doesn't happen without bringing in new clients, and we've had a lot of success with broad-based, both New York, Florida and our national businesses.

And we when you look at pipelines, which Tom will talk about, we feel very optimistic about continuing that growth.

It has also been helped by some seasonality.

As we have talked to you in the past, about the first half of the year, seasonality helps us the second half of the year not so much towards the end of the year actually hurts us.

I think similar trends will happen again.

So I don't think you will see in that $1 billion a quarter type of DDA growth for one reason only we just seasonality, but other than that, in terms of the core growth, you should expect similar level of new relationships coming on for the at least the next six months that we can foresee based on our pipeline.

What else?

Leslie, am I missing anything?

Oh, yes.

One very important topic.

Also, while we're doing all of this.

We built this bank by attracting like-minded people who want to be a part of a sort of organic growth story.

And this whole bank has been built on bringing in people like that over the years.

Our most recent add to our team that we announced a couple of months ago as Ernie Diaz, who's not in the room with me here.

But Ernie, came to us from TD Bank where he was Head of the Consumer Bank, ran the entire retail footprint, Rand of the wealth management business the auto finance business.

And before that, he has done just about every job at the bank.

So we're very happy that someone of his caliber would join us.

He's been with the bank, like I said, only a couple of months, but he is already bringing ideas to the table that we probably wouldn't have caught off if he was with us.

So a big welcome to Ernie, and I'm happy that the people are choosing to join BankUnited.

Let me turn this over to Tom and he'll go over the numbers in a little more detail, and then we'll move Leslie, after that.

So as Raj mentioned, total deposits were up $736 million for the quarter, including the reduction in brokered, non-brokered deposits grew total by $1.3 billion and IDDA by $826 million.

And NIDDA. is up 11% quarter-over-quarter.

As Raj alluded to, as we look forward, the pipelines, I think, remain very robust across all of the operating teams.

New account business, I think looks very good for the quarter.

As he mentioned, the back book is always, subject to seasonality issues.

But I think the new relationship pipeline, continues to look very strong for not only the third quarter, but we track opportunities out 180 days, kind of into the fourth quarter.

We are taking some advantage of this and looking at reducing some rates on higher-priced deposits.

Some of these were relationships or deposits that we increased during the financial disruption of the previous year.

And we think now is a good time as we are moving down cost of funds and continuing to increase deposits and pick what we're doing to take advantage of that and look at opportunities to reduce some very specific relationships and a higher rate type deposits.

On the loan side, overall loans were up $402 million quarter-over-quarter.

Again, core C&I increased segments growing $589 million in total [$475] for the C&I segment, $114 million for CRE mortgage warehouse was also up $83 million.

And consistent with our strategy, residential was down $212 million and the leasing and municipal finance subs were also down.

I would say that when we look at the growth for the quarter, both on the C&I side and on the CRE side, you can see from the information that you can pick up in the supplemental data, it was pretty broad based growth across the segments.

I would say seven or eight of our largest C&I segments all grew for the quarter.

The ones where we have our practice teams where we have our geographies predominantly focused, we saw a nice broad base growth.

If you look at CRE for the quarter, it grew within the asset segments that we're predominantly focused on now, which would be industrial, multi-family and urban kind of core, retail grocery-anchored type business.

And so you see the overall distribution of the credit portfolio largely stayed almost exactly as it was for the previous quarter, except with some growth in everything with the exception of obviously, office.

We did not grow, but overall, very, very healthy quarter four's commercial pipeline looks very good.

Going into Q3, we continue to expect high single growth in the core commercial portfolios for the year, consistent with prior guidance, more C&I and CRE, resi municipal Equipment Finance will continue to decline.

The operating lease equipment portfolio declined by $62 million this quarter, and we took advantage of some opportunities to selectively sell some assets as we've been moving away from that business.

I was looking at it yesterday over the last two years, we've declined our lease exposure from $702 million to $266 million over that period of time, and we're going to continue with that strategy.

The loan-to-deposit ratio improved from 89.6% to 88.7%.

Let's dig a little bit deeper into CRE and talk about office as well.

You can look at Slides 12 through 15 in the supplemental deck where we've added some additional disclosure.

So overall, big picture, our equity exposure remains, I think relatively modest to 24% of total loans create a total risk-based capital was 165%.

I think compared to others in our peer group in the $10 billion to $100 billion range.

Their numbers were 35% and 222% respectively.

So overall, we've continued to keep the CRE portfolio kind of within the risk parameters that we've always focused on, in that 24% in 165% is kind of a number that we're comfortable with.

At June 30, the weighted average LTV of the CRE portfolio was 56% and the weighted average DSCR was 1.77, 56% of the portfolio is in Florida and 27% is in the New York tri-state area.

I'll spend a little bit more time on offices.

I've told you on the last call, we track every single office loan.

They're all right in front of me right now, when we break it down by submarket and follow all the submarkets.

Just in general, I would say if we look at this quarter over last quarters, we have CRE office loans in 16 different sub markets that the company operates in.

The credit statistics this quarter compared to last quarter were better in nine of the 16 sub markets that we're in, and they were better in seven of the eight submarkets where we have exposure greater than $100 million.

So is that whose positive quarter as we look at tracking the credit metrics across the different business segments that ran and that was really primarily for one reason.

Occupancy generally remained pretty strong across the portfolio.

But what we really saw was abatement roll-off.

And so a lot of the leasing activity, obviously over the last couple of years, as contained abatement periods of time and during that abatement period of time, we don't count that in the NOI and we saw a pretty broad improvement in debt service coverage ratios this quarter in the major segments that we're in, largely because of improving abatement situations.

So specifically, we have $1.8 billion in office with 58% in Florida, which is predominantly suburban, 24% in the New York tri-state area.

Of that $309 million of the total portfolio is medical office, which really has pretty different debt service coverage ratios and debt yield dynamics from an industry perspective.

The construction portfolio also includes an additional $87 million in office related exposure, $84 million of that is in Manhattan.

Neither of those are ground-up construction.

They're really renovation of existing buildings.

The weighted average LTV of the stabilized office portfolio was 66% and weighted average debt service coverage ratio was 1.59 as of June 30.

There's also additional breakdown of those numbers by geography on slide 12. $402 million of the office loans mature in the next 12 months, $191 million of this is fixed rate.

Rent rollover in the next 12 months is 9% of the office portfolio.

So we have relatively light rent rollover in the next 12 months.

With respect to the stabilized New York Tri-State portfolio, 43% is in Manhattan.

This is approximately $180 million and as a 96% occupancy and lease rollover in the next 12 months of 6%, we continue to see some encouraging signs in the Manhattan market.

If you look at total, leasing for the first half of the year was 15.5 million square feet, which was up about 9% over the previous year, predominantly in Class A, space and certainly not at the level prior to the pandemic.

But it is a -- we have seen a consistent improvement in the leasing activity in Manhattan over the last two years.

This was the strongest quarter that we've seen increases over the last 12 months.

Demand and demographics continues to be generally favorable with Florida.

We are seeing a couple of weak spots in certain segments in the Orlando market, predominantly suburban North Orlando, where we have one of the loans Raj mentioned.

There are some charts on slide 16, that gives you a further geographic break down of the Florida and New York Tri-State portfolio by submarket.

I would say that all other markets in Florida are pretty strong.

I was mentioning to Leslie this morning, but I looked at the Tampa numbers for the quarter and over 1.4 million square feet of lease space, and only 6% of that was sublease activity.

So you're generally seeing sublease activity go down fairly consistently in Florida, you're seeing more positive absorption in most of the markets and virtually all the major submarkets in Florida for second quarter saw rent year-over-year rent increases modest but year-over-year rent increases.

We did have some CRE loans, as Raj mentioned, with the non-accruals this quarter.

For the first time, nonperforming CRE loans totaled $51 million as of June 30.

Total, criticized and classified loans increased by $88 million during the quarter.

This was all in the predominantly in the office segment.

Overall, the portfolio continues to perform comparatively well and is generally characterized by strong sponsors long-term asset owners, low basis in the in the assets and continue to support the underlying properties.

Today, concerns generally seem to be very asset-specific, our rent abatement periods and delays in completing build out of lease space in some cases, lower occupancy levels contributed to whatever risk migration we did have.

And overall, we continue to believe the ultimate loss content from this portfolio will be very manageable for us.

So with that, I'll turn it over to Leslie.

Thank Tom.

Just quick summary of our quarterly results.

As Raj said, net income for the quarter was $53.7 million or $0.72 per share.

Net interest income was up $11.2 million this quarter and the NIM increased 15 basis points to 2.72%.

The most significant contributor to this increase in margin was obviously an $888 million increase in average NIDDA, average NIDDA grew to 27.5% of average total deposits, and that's compared to 24.7% for the prior quarter.

Yield on loans was up from 5.78% to 5.85% as new production came on at higher rates and the portfolio composition continues to shift into higher yielding assets.

The yield on securities as expected, was essentially flat quarter over quarter.

We're very happy to see the average cost of total deposits declined to 3.09%for the second quarter compared to 3.18% last quarter, along with the slower pace of increase in the cost of interest-bearing deposits.

On a spot basis, the cost of interest-bearing deposits is stable quarter over quarter.

The average cost of FHLB advances did go up this quarter to 4.28% from 4,18%.

That's really just due to the expiration of a couple of cash flow hedges.

In from a guidance standpoint, we continue to expect the NIM to expand over the back half of '24, although I don't think we'll see 15 basis points per quarter.

I would love that, but it's not what I'm expecting, but still continue to expect NIM to end the year in the high twos and given that we're already at 2.72%, I guess now you have a little better idea of what I mean by the high twos.

Higher than that.

So we do and we expect a net interest income to be up mid single digits to low high double digits year over year.

Provision and reserve.

The provision this quarter was $20 million and the ACL loans ratio continued to increase from 90 basis points to 92 basis points.

The commercial ACL ratio, which includes C&I, CRE and franchise and equipment finance, stood at 1.42% at June 30.

This quarter's provision and the increase in the ACL were driven by risk rating migration and increase in some specific reserves, new loan production changes and portfolio characteristics, partially offset by some improvements in the economic forecast.

The reserve on CRE office was 2.47% at June 30, that's up from 2.26% at March 31.

This build was prompted by some of the risk made rating migration that you see and changes in commercial property market forecasts.

You might recall that last quarter we put up a pretty large qualitative reserve on CRE office over $20 million in anticipation of the fact that we were likely to see what we saw this quarter, some of that negative risk rating migration and this quarter you saw some of that move from the qualitative reserve to the quantitative reserve and getting picked up in the quantitative calculation.

We do expect the ACL to gradually build as a percentage of loans over the rest of 2024, likely getting closer to 1% and some of that's going to be driven by the expected shift in portfolio composition.

As Raj mentioned, criticized and classified assets declined by $52 million overall this quarter, with the $69 million increase in CRE being offset by a decline of $121 million in other commercial categories.

A few comments on non-interest income and expense.

Non-interest expense was pretty much flat quarter over quarter.

Lease financing income was down about $5.8 million.

That's due to two things, just the reduction in the size of the asset portfolio as well as fluctuation in residual income, which was a small loss this quarter compared to a small gain last quarter.

Other non-interest income, we did have an increase in income this quarter from our customer derivatives business, our commercial card business and syndication fees going forward I'd expect an overall gradually increasing trend in that line item, but there are some things in here that can cause some quarterly volatility.

I'll reiterate our mid-single-digit guidance for the year-over-year increase in noninterest expense, excluding the FDIC special assessments.

This does include some railcar refurbishment costs that we're expecting in the back half of the year.

And that's one of the things that's going to drive that increase.

I'll make a brief comment on the year-over-year increase in compensation expense.

Most of what you're seeing in the P&L is really driven by some fluctuations in liability classified share awards that are driven by changes in volatility in the company's stock price and some reversal of expense in the prior year for awards that didn't invest, core salary expense is really only up about 2%.

The ETR, I'd expect to be around 26.5% going forward, excluding discrete items as set one from a capital perspective, set one was stable at 11.6% this quarter compared to last quarter.

And TCETTA increased to 7.4%. that's all I have.

I'm going to turn it over to Raj for closing comments and then we'll take your questions.

I think listen, like I said at the beginning of the call, I couldn't be happier with the way the quarter turned out and looking forward, very optimistic when I look at the pipeline.

So all is well and happy and we'll be glad to take questions.

I will turn it over to the operator for Q&A.

(operator instructions)

Will Jones from KBW.

So first of all, congrats on a nice quarter.

I just wanted to start on deposits.

I mean, it's impressive what you guys are doing on the non-interest bearing front?

I mean growth was really nothing, but spectacular this year.

Sounds like there's continued optimism that the pipeline still looks good but maybe in the second half of the year, we might see a little bit of a seasonality kind of dampen that and maybe the easier way to think about non-interest bearing for the years, maybe just a full year growth rate.

If you look at what you guys have already done, approaching 20% growth for the year.

Is there just a broader target for what you see non-interest-bearing do on this year in terms of just maybe a growth rate?

I think of non-interest DDA, what we're shooting for is comfortable double-digit growth, but not 20%,30% growth that's when you take out seasonality, you take out sort of the ups and downs of any given quarter of having mid 10s type of growth is very hard to deliver by the way, especially in this environment.

But the environment stays as is and our pipeline say as healthy as they are we should be able to get, somewhere between 13%, 14%, 15%, 16% DDA growth.

That's what would be a long-term projection.

Now, the reality is that rates will not stay the same.

Things will move around.

And that can have a pretty big impact of give you a very simple just one example of one of our LOBs, which is the title business.

When there is a mortgage refi boom, you will see that gets supercharged right now all the growth that is coming is really from getting market share.

But the market itself, the wider market is very depressed because originations are at historic lows when mortgage originations start to pick up.

I don't know when that will be a year from now or 10 years from now, who knows.

But whatever they do, you will see those average account balances grow and not much we'll have to do, but except to sit here and enjoy the growth.

So But putting aside what the interest rate guards will do, just the speed at which business is growing.

I would say we're shooting for double digit DDA growth.

And I've said we want to get back to 30%.

We're at 29%.

We were 27% I think last quarter.

So we're making progress towards getting back and capturing that hill, which is now within grasp and then eventually getting back to our high watermark, which was, I think, 34%.

So that will be a good goal for some sometime next year.

Just to recap, from here through the rest of the year, I would expect just modest growth given the seasonal tail headwinds.

That's very helpful.

Great work on the NIDDA front.

Leslie, appreciate the margin guidance still kind of unchanged in the high 2% range.

But as we look at that the loan side in particular, you can kind of see the remake happening where core C&I and CRE is seeing strong growth and we have the runoff in motor and one to four-family still happening.

As you grow that core C&I and your runoff in mortgage, what is kind of that trade-off and yield?

I guess in other words, what is the new loan yields you guys are receiving versus what's running off?

I mean, call it around 8%. 7.5% to 8% on most of the new production and the resi portfolio yields in the mid threes.

So there you go.

You guys continue to target that high single-digit range for forward, kind of core loans.

Is it fair to assume that we will continue to kind of see maybe that 5 basis points to 10 basis points increase in loan yields going forward?

I mean, it seems reasonable.

Yes.

I just want to make one go back and make one more point about deposit growth.

The deposit growth that you're seeing is really five years of effort in the making.

And it's not something we did last quarter or even last year.

This is many years of working on product and technology and going to market, which is paying off today.

It's not like we hired a bunch of guys last quarter and they're bought this business and we really didn't not do that.

I talked about bringing Ernie, (multiple speakers)but it was not hearing anything about what you are hearing about.

And so there's a higher.

We could have gone that way.

We did not see a lot of producers over the last year from all the usual names, but we did not choose to do that.

This is more a long-term four five year strategy that is now coming into its own and he's helping us.

So just disappoint.

We'll I would also add on the loan yield side.

If we look at the pipeline going forward.

And we kind of look sort of opportunity by opportunity between what's approved, what's accepted term sheets and things of that nature.

I think that the home pricing market remains fairly good.

We're not seeing too much differential in terms of yields.

Obviously, virtually all banks are trying to put more emphasis on growing the C&I business versus growing other parts of their book.

But I think, as we look at a good quality pipeline, Q3 and early Q4, we're seeing a fair bit of firmness in the yield on loans right now.

Great job.

Well done, guys.

That does it for me.

Timur Braziler, Wells Fargo.

Maybe just following up on that line of questioning for DDA, Raj, you kind of alluded to the future opportunities within the title business and I apologize if I missed this in the prepared remarks, but can you just kind of go through where the DDA growth has been coming from in the first half of the year?

And then maybe frame what the opportunity in the title business might look like if we do get some rate relief and increased mortgage activity?

Yeah, that's predicting what will happen when there is a refi boom, it's a little hard.

It could be a 20%, 30% lift in just average deposit balances.

But it's I'm guessing and best.

I will say that, the growth that you saw this quarter was broad-based.

Having said that, title business was the biggest grower this quarter and also the biggest beneficiary of seasonality.

But I would also like to point out the HOA business has also been growing very well.

We organize that into a separate business line about three or four years ago, and invested in technology over there also over the course of last two years.

So they're seeing the benefit of that.

And we did some one or two of added to the sales team a couple of times last year, not not a lot of people, but just a couple of people here and there and they are all of that investment is paying off, so the HOA business also is far ahead of its budget for the year.

Such as just the way NTS our national title businesses, but we're seeing benefit in New York as well.

And in New York, the story has been a little bit about the disruption in the marketplace that has given us an opening to pick up some core business.

In Florida, it's a healthy market.

So that also grew this quarter that had a couple of things which shrunk Also this quarter, but those are seasonality trends in the other direction, but that's not DDA, that was municipal, which is largely a money market business that grows in the fourth quarter by shrinks in the first second and third quarter.

So that went the other way.

So there's a lot of moving parts.

But overall, I would say it was broad-based growth.

Yes, the title business was probably the biggest contributor and also the biggest beneficiary of the seasonality trends, but that also hurt the most in the fourth quarter when seasonality goes the other way.

I would add that we also saw a good increase in the corporate banking deposit business in the quarter, which is virtually all kind of transactional business.

And it was across all of the geographies that we're in.

So it was a combination of both kind of specialty businesses and broad geography businesses.

Okay, great.

And then just again, a follow-up on the title business.

Specifically.

What are those balances today that instead of DDA?

And then just to kind of frame the opportunity, maybe what was the balance of (inaudible) things about what rate for borrowers, I think for us?

So we don't really disclose that kind of detail about deposit balances by line of business.

In the aggregate, though, I think the title business is around $4 billion and most of that's DDA, but I don't have those exact numbers in front of me, and we don't typically make that kind of public disclosure.

Just one last one for me.

Just looking at some of the degradation in the office portfolio over the last couple of quarters and appreciate the comments on the qualitative reserve last quarter moving into qualitative this quarter.

I guess is it really just the lease abatements?

That's the biggest issue right now that you're seeing within the office book.

And as you sit here today, assuming no other commercial categories kind of stay stable, how should we think about the reserve on the office portfolio, maybe relative to what you're seeing for the trends in the last couple of quarters?

I'll comment on the reserve and then I'll let Tom add a little bit color around the book.

Nothing we are seeing is outside of RX of what we've been expecting to happen.

We've been telling you for several quarters now that some of these loans are going to have issues.

We didn't know which ones now we kind of know which ones and that this is exactly in line with our expectations for what was going to happen in the office book and the reserve is at about 2.5%, and we feel like that's worth that's adequate.

I would say that if you look at the overall performance of the office portfolio and the overall occupancy, debt service coverage and debt yield numbers, it points to a portfolio that overall is doing well.

Now, there will be a couple of spots within it there will be very asset-specific, deals that, have a challenge, I would say predominantly it's lease up rent abatement issues that impact the DSCE, early on because during the abatement periods, the building is physically occupied, but it's not economically occupied because it's not contributing to NOI.

There are the one building Raj mentioned in New York is a building that's gone through renovation.

We have through renovation buildings in New York, and those do have to go through a lease-up period and then an abatement period.

So there are a couple of asset specifics that aren't in the portfolio.

But overall, if you go through all 98 loans that I have in front of me, the vast majority of them are performing very well.

Great.

Thanks for that color.

(operator instructions) David Bishop, Hovde Group.

Good morning.

Raj was [in the US but] specifically, I know we spoke about this, but there's been a lot of, I guess, argue the act about maybe the commercial, but the CMBS market here, and I know you have some exposure there.

Just curious how you're feeling about the ramp of that portfolio these days in relation to what's been on the press there.

Have you seen any sort of risk of impairment?

Just curious how that's that's holding up overall?

So yes, collateral losses have increased in the CMBS market, but we are seeing no risk of impairment whatsoever in our portfolio.

All of our holdings are extremely well enhanced.

We rigorously test, stress test each and every one of those securities on a at least quarterly basis.

And we don't see any potential signs of impairment at all at this time because of the level of credit enhancement that we have.

And we do monitor it on a deal-by-deal basis very rigorously.

And you guys have or the single asset single tenant?

Correct.

Thank you for asking.

We have no single asset single borrower exposure.

Got it.

And then Leslie, just I think I missed it.

The operating expense guidance.

How should we think about that in the back half of the year, it sounds like there could be some of the expenses?

Yes, still mid single digit increase year over year in the aggregate.

So no change to our guidance and I just made the point that one of the things that's going to drive that is some railcar refurbishment that will happen, but no change in our overall guidance.

Great.

Thank you.

Steven Alexopoulos, JPMorgan.

Thanks.

Good morning.

It's Alex Lau on for Steve.

Morning, Alex.

I have a question a follow-up on the DDA in the title solutions business.

In terms of the seasonality for that business is last year, seasonal trends a good period to model after or has anything changed in that business that would result in last year?

It's not being a data point to refer to?

I think you could use that probably the best year that you could probably peel that would be last year.

Yeah I would say that, yes, last year was probably as typically year.

Probably as Raj said earlier, something happening in the rate market.

But all else held equal, that makes sense.

Got it.

And how much of the growth in the title solutions business this year has been from gaining market share versus some seasonality?

I will say I'll give you that business is growing at mid-teens level.

If you take out the seasonality in terms of new relationships, that we're adding on.

And in terms of balances, even though for seasonality, it's about mid-teen growth rate.

We're bringing on about 40 to 45 clients per day quarter.

That would equate to about a 15% to 18% increase in the overall client base.

Great color.

Thank you.

And then my last one.

How big is your deposit pipeline for treasury management quarter end.

And how does that compare to the prior quarter?

It's very similar.

It really hasn't, from beginning of this year to now, as we're bringing in as closing in the pipeline new to go into the pipeline, it really hasn't changed.

That pipeline has actually been pretty consistent for some time.

It tends to get replenished at about at a pretty constant rate.

So thanks for answering my questions.

Ben Gerlinger, Citi.

I apologize up front, there's a lot of calls going on this morning some that have a pretty good quarter.

So I wouldn't read the transcript while you're talking, but is there any have you guys given any indication of kind of overall capital deployment, whether it be share repurchase or potential down the road for continued outsized loan growth.

Just trying to get a sense of how you guys are thinking about capital, given that you share prices still fairly compressed has had a good rebound here, but also you also had a good quarter for growth in the Southeast.

In general, it seems to have a better economic backdrop?

Yeah, we blessed we are now we're working on the Board agenda for August actually just yesterday, and I told her to add a section on on capital discussions.

So listen, we're looking at a pretty happy set of facts here.

They we're seeing some growth opportunity.

We're seeing capital build up.

And my first choice is always is to actually deploy that capital and grow it profitably.

If we're not able to see that for a sustained period of time, then we think about buybacks.

And then, of course, in the back of our mind is always the environment.

If it is conducive to buybacks or not.

And also, you heard us in the past that we are very sensitive to all our stakeholders, especially the rating agencies who are quite sensitive about capital return.

So we're going to keep all of that in mind.

We'll have a discussion in August, and I don't want to get ahead of myself and say something that, I'm not authorized yet by the board, but we'll have a discussion like we've had in the past.

But right now, we're out on the sidelines maybe in August, we'll do something or maybe later in the year.

But right now, I'm looking at a decent pipeline and if we can actually deploy this capital, that will be the best thing, the best outcome.

Gotcha.

Are you

--

This year, we've given guidance of balance sheet will not grow afforded from beginning to the end of the year.

And I think, give or take will probably end up at that level.

But I want to grow eventually, but we're not growing is no fun.

So lastly will kill me if I start going in by next year.

So I won't but I want to get back into growth business.

Are you able to say what day the Board meeting is.

So I know what data

(inaudible)

No, If anything happens, there will be a press release. yesterday you have hospitals.

Good.

I'm just trying to get funded by about four minutes.

Well appreciated.

Thank you.

Thank you.

At this time, I would now like to turn the conference back over to Raj Singh for closing remarks.

Like I said, India winning the World Cup was the big cherry on a pretty decent Sunday.

We're very happy with the way the quarter turned out.

We're very optimistic as we look to the future.

And thank you for your time this morning and call us if you have any more detailed questions.

Otherwise, we'll see you or talk to you again in three months.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.