BankUnited Inc

Previous wording

The following discussion and analysis is intended to focus on significant matters impacting and changes in the financial condition and results of operations of the Company during the three months ended March 31, 2024 and should be read in conjunction with the consolidated financial statements and notes hereto included in this Quarterly Report on Form 10-Q and BKU's 2023 Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Annual Report on Form 10-K").

Current wording

The following discussion and analysis is intended to focus on significant matters impacting and changes in the financial condition and results of operations of the Company during the six months ended June 30, 2024 and should be read in conjunction with the consolidated financial statements and notes hereto included in this Quarterly Report on Form 10-Q and BKU's 2023 Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Annual Report on Form 10-K").

Previous wording

Net income for the three months ended March 31, 2024, was $48.0 million, or $0.64 per diluted share, compared to $52.9 million, or $0.70 per diluted share for the three months ended March 31, 2023. For the three months ended March 31, 2024, the annualized return on average stockholders' equity was 7.31% and the annualized return on average assets was 0.54%.

Current wording

Net income for the three months ended June 30, 2024, was $53.7 million, or $0.72 per diluted share, compared to $58.0 million, or $0.78 per diluted share, for the three months ended June 30, 2023. Net income for the six months ended June 30, 2024, was $101.7 million, or $1.36 per diluted share, compared to $110.9 million, or $1.48 per diluted share for the six months ended June 30, 2023. For the six months ended June 30, 2024, the annualized return on average stockholders' equity was 7.68% and the annualized return on average assets was 0.58%.

Previous wording

•The average cost of total deposits increased to 3.18% for the three months ended March 31, 2024, from 2.96% for the immediately preceding three months ended December 31, 2023, and 2.05% for the three months ended March 31, 2023. The cost of deposits is showing signs of stabilizing. On a spot basis, the cost of total deposits was 3.17% at March 31, 2024 compared to 3.18% at December 31, 2023.

Current wording

◦The average cost of total deposits declined by 0.09% to 3.09% for the three months ended June 30, 2024, from 3.18% for the immediately preceding three months ended March 31, 2024. The spot APY of total deposits declined to 3.09% at June 30, 2024 from 3.17% at March 31, 2024. The spot APY of interest bearing deposits was stable at 4.29% at both June 30, 2024 and March 31, 2024.

Previous wording

◦The funding mix continued to improve as non-interest bearing demand deposits grew by $404 million for the three months ended March 31, 2024. Non-brokered deposits grew by $644 million and total deposits grew by $489 million. Non-interest bearing demand deposits represented 27% of total deposits at March 31, 2024, up from 26% at December 31, 2023.

Current wording

◦The funding mix continued to improve as non-interest bearing demand deposits grew by $826 million for the three months ended June 30, 2024 to 29% of total deposits, up from 27% at March 31, 2024. Non-brokered deposits grew by $1.3 billion and total deposits grew by $736 million. Average non-interest bearing demand deposits grew by $888 million for the quarter ended June 30, 2024.

Previous wording

◦Wholesale funding, including FHLB advances and brokered deposits, declined by $1.4 billion for the three months ended March 31, 2024.

Current wording

◦Wholesale funding, including FHLB advances and brokered deposits, declined by $1.2 billion for the three months ended June 30, 2024.

Previous wording

◦Credit is favorable. The annualized net charge-off ratio for the three months ended March 31, 2024, was 0.02%. The NPA ratio at March 31, 2024 declined to 0.34%, including 0.11% related to the guaranteed portion of non-performing SBA loans, from 0.37%, including 0.12% related to the guaranteed portion of non-performing SBA loans at December 31, 2023.

Current wording

◦Credit trends remain largely favorable although we are seeing some expected normalization. The annualized net charge-off ratio for the six months ended June 30, 2024, was 0.12%. The NPA ratio at June 30, 2024 was 0.50%, including 0.11% related to the guaranteed portion of non-performing SBA loans, compared to 0.34%, including 0.11% related to the guaranteed portion of non-performing SBA loans at March 31, 2024. The NPA ratio remains below pre-pandemic levels.

Previous wording

•At March 31, 2024, the ratio of the ACL to total loans was 0.90% compared to 0.82% at December 31, 2023. The ACL to loans ratio for commercial portfolio sub-segments including C&I, CRE, franchise finance and equipment finance was 1.42% at March 31, 2024 and the ACL to loans ratio for CRE office loans was 2.26%.

Current wording

◦The ratio of the ACL to total loans increased to 0.92% at June 30, 2024; the ratio of the ACL to non-performing loans was 130.12%. The ACL to loans ratio for commercial portfolio sub-segments including C&I, CRE, franchise finance and equipment finance was 1.42% at June 30, 2024 and the ACL to loans ratio for CRE office loans was 2.47%.

Previous wording

•Commercial real estate exposure is modest. Commercial real estate loans totaled 24% of loans at March 31, 2024, representing 166% of the Bank's total risk-based capital. By comparison, based on call report data as of December 31, 2023, (the most recent date available) for banks with between $10 billion and $100 billion in assets, the median level of CRE to total loans was 35% and the median level of CRE to total risk based capital was 225%.

Current wording

◦Commercial real estate exposure is modest totaling 24% of loans and 165% of the Bank's total risk-based capital at June 30, 2024. By comparison, based on call report data as of March 31, 2024 for banks with between $10 billion and $100 billion in assets, the median level of CRE to total loans was 35% and the median level of CRE to total risk based capital was 222%.

Previous wording

◦Liquidity is ample. Total same day available liquidity was $14.8 billion, the available liquidity to uninsured, uncollateralized deposits ratio was 156% and an estimated 65% of our deposits were insured or collateralized at March 31, 2024.

Current wording

◦Total same day available liquidity was $14.9 billion, the available liquidity to uninsured, uncollateralized deposits ratio was 139% and an estimated 61% of our deposits were insured or collateralized at June 30, 2024.

Previous wording

◦Our capital position is robust. At March 31, 2024, CET1 was 11.6% and pro-forma CET1, including accumulated other comprehensive income, was 10.3%. The ratio of tangible common equity/tangible assets increased to 7.3%.

Current wording

◦At June 30, 2024, CET1 was 11.6% and pro-forma CET1, including accumulated other comprehensive income, was 10.4%. The ratio of tangible common equity/tangible assets increased to 7.4%.

Previous wording

•The net unrealized pre-tax loss on the AFS securities portfolio continued to improve, declining by $36 million for the three months ended March 31, 2024, now representing 5% of amortized cost. The duration of our AFS securities portfolio remained short at 1.85 at March 31, 2024. HTM securities were not significant.

Current wording

◦The net unrealized pre-tax loss on the AFS securities portfolio continued to improve, declining by $36 million for the three months ended June 30, 2024, representing 5% of amortized cost. The duration of our AFS securities portfolio remained short at 1.82 at June 30, 2024. HTM securities were not significant.

Previous wording

•Book value and tangible book value per common share grew to $35.31 and $34.27, respectively, at March 31, 2024, from $34.66 and $33.62, respectively, at December 31, 2023.

Current wording

◦Book value and tangible book value per common share grew to $36.11 and $35.07, respectively, at June 30, 2024, from $35.31 and $34.27, respectively, at March 31, 2024.

Previous wording

(1)On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $3.2 million for the three months ended March 31, 2024 and $3.3 million for both the three months ended December 31, 2023, and March 31, 2023. The tax-equivalent adjustment for tax-exempt investment securities was $0.8 million for the three months ended March 31, 2024, and $0.9 million for both the three months ended December 31, 2023 and March 31, 2023.

Current wording

(1)On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $3.1 million for the three months ended June 30, 2024, $3.2 million for the three months ended March 31, 2024, and $3.3 million for the three months ended June 30, 2023. The tax-equivalent adjustment for tax-exempt investment securities was $0.9 million for the three months ended June 30, 2024, $0.8 million for the three months ended March 31, 2024 and $0.9 million for the three months ended June 30, 2023.

Previous wording

Net interest income, calculated on a tax-equivalent basis, was$218.9 million for thethree months ended March 31, 2024, compared to $221.4 millionfor the three months ended December 31, 2023, a decrease of $2.5 million. The decrease in net interest income was comprised of decreases in tax-equivalent interest income of $1.9 million and increases in interest expense totaling $0.6 million, for thethree months ended March 31, 2024, compared to thethree months ended December 31, 2023. The net interest margin, calculated on a tax-equivalent basis, was 2.57% for the three months ended March 31, 2024, compared to 2.60% for thethree months ended December 31, 2023.

Current wording

Net interest income, calculated on a tax-equivalent basis, was$230.0 million for thethree months ended June 30, 2024, compared to $218.9 millionfor the three months ended March 31, 2024, an increase of $11.1 million. The increase in net interest income was comprised of an increase in tax-equivalent interest income of $1.8 million and a decrease in interest expense of $9.3 million for thethree months ended June 30, 2024, compared to thethree months ended March 31, 2024. The net interest margin, calculated on a tax-equivalent basis, was 2.72% for the three months ended June 30, 2024, compared to 2.57% for thethree months ended March 31, 2024.

Previous wording

•The tax-equivalent yield on loans increased to 5.78% for the three months ended March 31, 2024, from 5.69% for thethree months ended December 31, 2023. This increase reflects the originations of new loans at higher rates, paydowns of lower rate loans and balance sheet repositioning.

Current wording

•The tax-equivalent yield on loans increased to 5.85% for the three months ended June 30, 2024, from 5.78% for thethree months ended March 31, 2024. This increase reflects the origination of new loans at higher rates, paydowns of lower rate loans and balance sheet repositioning.

Previous wording

•The average rate paid on FHLB advances decreased to 4.18% for the three months ended March 31, 2024 from 4.58% for the three months ended December 31, 2023, primarily due to repayment of higher rate advances.

Current wording

•The average rate paid on FHLB advances increased to 4.28% for the three months ended June 30, 2024 from 4.18% for the three months ended March 31, 2024, reflecting maturities of cash flow hedges.

Previous wording

Net interest income, calculated on a tax-equivalent basis, was $218.9 million for the three months ended March 31, 2024, compared to $232.1 million for the three months ended March 31, 2023, a decrease of $13.2 million, comprised of increases in tax-equivalent interest income and interest expense of $40.9 million and $54.1 million, respectively. The increase in interest income for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, reflected rising yields on interest earning assets that more than offset the decline in average interest earning assets. Similarly, the increase in interest expense for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, resulted from an increase in the cost of interest bearing liabilities that more than offset the decline in average interest bearing liabilities.

Current wording

Increases in interest income for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023, reflected rising yields on interest earning assets that more than offset the decline in average interest earning assets. Similarly, increases in interest expense for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023, resulted from increases in the cost of interest bearing liabilities that more than offset the decline in average interest bearing liabilities.

Previous wording

The net interest margin, calculated on a tax-equivalent basis, was 2.57% for the three months ended March 31, 2024, compared to 2.62% for the three months ended March 31, 2023. The increase in cost of deposits outpaced the increase in the yield on interest earning assets for the comparative periods. Increased yields on average interest earning assets as well as the increase in the cost of deposits reflected increasing market interest rates.

Current wording

The net interest margin, calculated on a tax-equivalent basis, increased to 2.72% and 2.64% for the three and six months ended June 30, 2024, respectively, from 2.47% and 2.55% for the three and six months ended June 30, 2023, respectively. The increase in the net interest margin for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 was primarily a result of balance sheet repositioning and an improved funding mix. Increased yields on average interest earning assets as well as increases in the cost of deposits reflected the ongoing impact of higher prevailing market interest rates.

Previous wording

Further discussion of factors impacting the net interest margin for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 follows:

Current wording

Further discussion of factors impacting the net interest margin for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 follows:

Previous wording

•The tax-equivalent yield on investment securities increased to 5.59% for thethree months ended March 31, 2024, from 4.95% for thethree months ended March 31, 2023. This increase resulted primarily from the reset of coupon rates on variable rate securities and to a lesser extent, purchases of higher-yielding securities and paydowns and sales of lower-yielding securities.

Current wording

•The tax-equivalent yield on investment securities increased to 5.60% and 5.59% for the three and six months ended June 30, 2024, from 5.19% and 5.07% for the three and six months ended June 30, 2023. These increases resulted primarily from the reset of coupon rates on variable rate securities, purchases of higher-yielding securities and paydowns and sales of lower-yielding securities.

Previous wording

•The average rate paid on FHLB advances decreased to 4.18% for thethree months ended March 31, 2024, from 4.27% for thethree months ended March 31, 2023, primarily due to repayment of higher rate advances.

Current wording

•The average rate paid on FHLB advances decreased to 4.28% and 4.22%for thethree and six months ended June 30, 2024, from 4.59% and 4.44%for thethree and six months ended June 30, 2023, primarily due to repayment of higher rate advances, partially offset by maturities of cash flow hedges in the second quarter of 2024.

Previous wording

The most significant factors impacting the provision for credit losses for the three months ended March 31, 2024, were an increase in qualitative loss factors, particularly related to the office CRE portfolio sub-segment, and risk rating migration, partially offset by an improved economic forecast.

Current wording

The most significant factors impacting the provision for credit losses for the three and six months ended June 30, 2024, were new loan production and changes in portfolio characteristics; risk rating migration and an increase in specific reserves; for the six month period, an increase in qualitative reserves, particularly related to office CRE; all partially offset by an improved economic forecast.

Previous wording

The losses on marketable equity securities during the three months ended March 31, 2023, were attributable to losses related to certain preferred equity investments.

Current wording

The losses on marketable equity securities during the six months ended June 30, 2023, were attributable to losses related to certain preferred equity investments.

Previous wording

The decrease in lease financing revenue for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was attributable to the impact of the sale of some operating lease equipment, reducing the size of the portfolio.

Current wording

The decrease in lease financing revenue for the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023, was primarily attributable to a lower level of rental income as we have opportunistically sold some operating lease equipment in a strategic effort to reduce the size of the operating lease equipment portfolio. Expense related to the depreciation of operating lease equipment reflected a corresponding decrease over these comparative periods.

Previous wording

The increases in deposit insurance expense was primarily attributable to an additional $5.2 million related to an FDIC special assessment during the three months ended March 31, 2024.

Current wording

The year-over-year increase in deposit insurance expense was primarily attributable to an additional $5.2 million related to an FDIC special assessment during the six months ended June 30, 2024.

Previous wording

The decline in depreciation of operating lease equipment for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, is primarily attributed to the reduction in operating lease equipment, corresponding to the decline in lease financing revenue.

Current wording

The decline in depreciation of operating lease equipment for the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023, is primarily attributed to a smaller operating lease equipment portfolio, corresponding to the decline in lease financing revenue.

Previous wording

Our investment strategy is focused on ensuring adequate liquidity, maintaining a suitable balance of high credit quality, diverse assets, managing interest rate risk, and generating acceptable returns given our established risk parameters. We have sought to maintain liquidity by investing a significant portion of the portfolio in high quality liquid securities including U.S. Treasury and U.S. Government Agency and sponsored enterprise securities. We have also invested in highly-rated structured products, including private-label commercial and residential MBS, collateralized loan obligations, single family real estate-backed securities and non-mortgage asset-backed securities that, while somewhat less liquid, are generally pledgeable at either the FHLB or the FRB and provide us with attractive yields. Investment grade municipal securities provide liquidity and attractive tax-equivalent yields. We remain committed to keeping the duration of our securities portfolio short; relatively short effective portfolio duration helps mitigate interest rate risk. Based on the Company’s assumptions, the effective duration of the investment portfolio was 1.86 years andthe estimated weighted average life of the portfolio was 5.5 yearsas of March 31, 2024.

Current wording

Our investment strategy is focused on ensuring adequate liquidity, maintaining a suitable balance of high credit quality, diverse assets, managing interest rate risk, and generating acceptable returns given our established risk parameters. We have sought to maintain liquidity by investing a significant portion of the portfolio in high quality liquid securities including U.S. Treasury and U.S. Government Agency and sponsored enterprise securities. We have also invested in highly-rated structured products, including private-label commercial and residential MBS, collateralized loan obligations, single family real estate-backed securities and non-mortgage asset-backed securities that, while somewhat less liquid, are generally pledgeable at either the FHLB or the FRB and provide us with attractive yields. Investment grade municipal securities provide liquidity and attractive tax-equivalent yields. We remain committed to keeping the duration of our securities portfolio short; relatively short effective portfolio duration helps mitigate interest rate risk. Based on the Company’s assumptions, the effective duration of the investment portfolio was 1.83 years andthe estimated weighted average life of the portfolio was 5.4 yearsas of June 30, 2024.

Previous wording

The investment securities AFS portfolio was in a net unrealized loss position of $498.4 million at March 31, 2024, compared to a net unrealized loss position of $534.8 million at December 31, 2023, improving by $36.4 million during the three months ended March 31, 2024. Net unrealized losses at March 31, 2024 included $6.4 million of gross unrealized gains and $504.8 million of gross unrealized losses. Investment securities available for sale in unrealized loss positions at March 31, 2024 had an aggregate fair value of $7.7 billion. The unrealized losses resulted primarily from a sustained period of higher interest rates, and in some cases, wider spreads compared to the levels at which securities were purchased. Market volatility and yield curve dislocations have also contributed to unrealized losses. None of the unrealized losses were attributable to credit loss impairments.

Current wording

The investment securities AFS portfolio was in a net unrealized loss position of $462.5 million at June 30, 2024, compared to a net unrealized loss position of $534.8 million at December 31, 2023, improving by $72.3 million during the six months ended June 30, 2024. Net unrealized losses at June 30, 2024 included $10.3 million of gross unrealized gains and $472.8 million of gross unrealized losses. Investment securities available for sale in unrealized loss positions at June 30, 2024 had an aggregate fair value of $6.6 billion. The unrealized losses resulted primarily from a sustained period of higher interest rates, and in some cases, wider spreads compared to the levels at which securities were purchased. None of the unrealized losses were attributable to credit loss impairments.

Previous wording

Included in New York tri-state multifamily loans in the tables above is approximately $121 million of rent regulated exposure as of March 31, 2024.

Current wording

Included in New York tri-state multifamily loans in the tables above is approximately $119 million of rent regulated exposure as of June 30, 2024.

Previous wording

The following table present scheduled maturities of the CRE portfolio by property type at March 31, 2024 (in thousands):

Current wording

The following table presents scheduled maturities of the CRE portfolio by property type at June 30, 2024 (in thousands):

Previous wording

The New York tri-state market encompasses approximately 24% of the office segment, with $181 million of exposure in Manhattan. As of March 31, 2024, the Manhattan office portfolio was approximately 96% occupied with 4% rent rollover expected in the next twelve months. Substantially all of the Florida office portfolio is suburban.

Current wording

The New York tri-state market encompasses approximately 24% of the office segment, with $180 million of exposure in Manhattan. As of June 30, 2024, the Manhattan office portfolio was approximately 96% occupied with 6% rent rollover expected in the next twelve months. The Florida office portfolio is predominantly suburban.

Previous wording

Office loans not secured by properties in Florida or the New York tri-state area comprised 17%, or $313 million of the segment, and exhibited no particular geographic concentration. Estimated rent rollover of the total office portfolio in the next 12 months is approximately 10%. Non-performing office loans were insignificant at March 31, 2024, totaling approximately $300 thousand. Also see the section entitled "Asset Quality" below.

Current wording

Office loans not secured by properties in Florida or the New York tri-state area comprised 18%, or $319 million of the segment, and exhibited no particular geographic concentration. Estimated rent rollover of the total office portfolio in the next 12 months is approximately 9%.

Previous wording

(1) Includes $1.9 billion of owner occupied real estate.

Current wording

(1) Includes $2.0 billion of owner occupied real estate.

Previous wording

Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides franchise and equipment financing on a national basis using both loan and lease structures. Pinnacle provides essential-use equipment financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures including equipment lease purchase agreements and direct (private placement) bond re-fundings and loan agreements. Bridge has two divisions. The franchise finance division portfolio includes franchise acquisition, expansion and equipment financing facilities, typically extended to experienced operators in well-established concepts. The franchise finance portfolio is made up primarily of quick service restaurant and fitness concepts comprising 43% and 52% of the portfolio, respectively, at March 31, 2024. The equipment finance division portfolio includes primarily transportation equipment finance facilities utilizing a variety of loan and lease structures. Franchise and equipment finance have been strategically de-emphasized due to their current risk/return profile, including the lack of significant deposit business with these customers. We do not expect significant new loan originations in these segments.

Current wording

Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides franchise and equipment financing on a national basis using both loan and lease structures. Pinnacle provides essential-use equipment financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures including equipment lease purchase agreements and direct (private placement) bond re-fundings and loan agreements. Bridge has two divisions. The franchise finance division portfolio includes franchise acquisition, expansion and equipment financing facilities, typically extended to experienced operators in well-established concepts. The franchise finance portfolio is made up primarily of quick service restaurant and fitness concepts comprising 44% and 50% of the portfolio, respectively, at June 30, 2024. The equipment finance division portfolio includes primarily transportation equipment finance facilities utilizing a variety of loan and lease structures. Franchise and equipment finance have been strategically de-emphasized due to their current risk/return profile, including the lack of significant deposit business with these customers. We do not currently expect significant new loan originations in these segments.

Previous wording

The Company acquires non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations upon default (collectively, "government insured pool buyout loans" or "buyout loans"). Buyout loans that re-perform, either through modification or self-cure, may be eligible for re-securitization. The Company and the servicer share in the economics of the sale of these loans into new securitizations. The balance of buyout loans totaled $1.2 billion at March 31, 2024. The Company is not the servicer of these loans.

Current wording

The Company acquires non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations upon default (collectively, "government insured pool buyout loans" or "buyout loans"). Buyout loans that re-perform, either through modification or self-cure, may be eligible for re-securitization. The Company and the servicer share in the economics of the sale of these loans into new securitizations. The balance of buyout loans totaled $1.1 billion at June 30, 2024. The Company is not the servicer of these loans.

Previous wording

Operating lease equipment, net declined by $43 million during the three months ended March 31, 2024 to $329 million as a result of disposals. We expect the balance of operating lease equipment to continue to decline as this product offering is no longer considered core to our business strategy.

Current wording

Operating lease equipment, net declined by $105 million during the six months ended June 30, 2024 to $267 million as a result of disposals. We expect the balance of operating lease equipment to continue to decline as this product offering is no longer considered core to our business strategy.

Previous wording

Bridge had exposure to the energy industry of $147 million at March 31, 2024. The majority of the energy exposure was in the operating lease equipment portfolio where energy exposure totaled $139 million, consisting primarily of railcars serving the petroleum industry.

Current wording

Bridge had exposure to the energy industry of $120 million at June 30, 2024. The majority of the energy exposure was in the operating lease equipment portfolio where energy exposure totaled $113 million, consisting primarily of railcars serving the petroleum industry.

Previous wording

We have a robust credit risk management framework, an experienced team to lead the workout and recovery process for the commercial and commercial real estate portfolios and a dedicated internal credit review function. Loan performance is monitored by our credit administration, portfolio management and workout and recovery departments. Risk ratings are updated continuously; generally, commercial relationships with balances in excess of defined thresholds are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. The defined thresholds range from $1 million to $3 million. Homogenous groups of smaller balance commercial loans may be monitored collectively. The credit quality and risk rating of commercial loans as well as our underwriting and portfolio management practices are regularly reviewed by our internal independent credit review department.

Current wording

We have a robust credit risk management framework, an experienced team to lead the workout and recovery process for the commercial and commercial real estate portfolios and a dedicated internal credit review function. Loan performance is monitored by our credit administration, portfolio management and workout and recovery departments. Risk ratings are updated continuously; generally, commercial relationships with balances in excess of defined thresholds are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. The defined thresholds range from $1 million to $3 million. Homogenous groups of smaller balance commercial loans may be monitored collectively.

Previous wording

The $255 million increase in the substandard accruing category for the quarter ended March 31, 2024 included $187 million of CRE, $115 million of which was office exposure (including construction loans). All of these loans continue to perform. Factors contributing to risk rating migration in the office portfolio included rent abatement periods, delays in completing build-out of leased space and in some cases what we expect to be temporarily lower occupancy levels. In the current market, when office space is leased to new tenants, landlords frequently provide initial rent abatement periods. During these rent abatement periods, we do not include pro-forma rental payments to be made in the future under the terms of new leases, in operating cash flows for the purposes of determining risk ratings.

Current wording

Total criticized and classified commercial loans increased by $232 million for the six months ended June 30, 2024, but declined by $52 million for the quarter ended June 30, 2024. Criticized and classified CRE loans increased by $297 million for the six months ended June 30, 2024, $278 million of which was office exposure (including office related construction loans), offset by declines of $65 million in other commercial categories. As expected in the current environment, there has been some further risk rating migration within the criticized and classified population, primarily within the CRE office category. Rent abatement periods, delays in completing build-out of leased space and in some cases lower occupancy levels contributed to risk rating migration in the office portfolio. When office space is leased to new tenants, landlords frequently provide initial rent abatement periods. During these rent abatement periods, we do not include pro-forma rental payments to be made in the future under the terms of new leases in operating cash flows for the purposes of determining risk ratings.

Previous wording

Excluding government insured loans, our residential portfolio consists largely of performing jumbo mortgage loans with FICO scores above 700, primarily owner-occupied and full documentation, with current LTV's of 80% or less. Loans with LTVs higher than 80% may be extended to selected credit-worthy borrowers. We perform due diligence on the purchased loans for credit, compliance, counterparty, payment history and property valuation.

Current wording

Excluding government insured loans, our residential portfolio consists largely of performing jumbo mortgage loans with FICO scores above 700, full documentation, current LTVs of 80% or less and are primarily owner-occupied. Loans with LTVs higher than 80% may be extended to selected credit-worthy borrowers. We perform due diligence on the purchased loans for credit, compliance, counterparty, payment history and property valuation.