BankUnited Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 22, 2024

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to BankUnited Inc. Third Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please note that today's conference is being recorded. I will now hand the conference over to your host, Jackie Bravam. Please go ahead.

Speaker 1

Good morning, and thank you for joining us today for BankUnited Inc. Q3 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 that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates and expectations.

Speaker 1

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 those related to the company's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by external circumstances outside of 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 considered as exhaustive.

Speaker 1

Information on these factors can be found in the company's annual report on Form 10 ks for the year ended December 2031, 2023, and any subsequent quarterly report on Form 10 Q or current report on 8 ks, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Raj Singh.

Speaker 2

Thank you, Jackie. Thank you for joining us for this call. Let me start by just quickly going through the numbers. This is a good quarter. Net income came in at $61,500,000 or $0.81 a share.

Speaker 2

I think last quarter, we were $0.72 and the quarter this time last year, we were at $0.63 I had checked last week what the consensus estimates were. I think it was $0.74 So always happy when we do a little better than consensus. What contributed to this, 1st and foremost is margin. We had guided to the fact that margin would be up and it was up. We margin came in at 2.78%.

Speaker 2

I think last quarter we were at 2.72%. So nice growth in margin. Actually, if I look from Q3 of last year to this, it's been a 9% increase in our margin. So we're happy about that. This was officially the quarter in which the inflection, the monetary policy inflection happened, happened pretty late in the quarter, but we started acting on bringing down cost of funds, even slightly before that.

Speaker 2

The cost of deposits this quarter declined to $306,000,000 from $309,000,000 last quarter. Cost of interest bearing deposits came down from $426,000,000 to $420,000,000 Now remember the Fed move happened pretty late in the quarter. So if you want to see a better impact of all of that, you should look at our spot rates. And the portfolio, APY on deposits on September 30 was 2.93. Dollars On June 30, it was $309,000,000 And if you look at just spot APY for interest bearing, it came down from $429,000,000 in June to $401,000,000 Even this doesn't actually fully include the actions that we're taking on deposits, because some of our deposit products get only priced monthly.

Speaker 2

So the stuff that happened on October 1 is outside of that. So we're being long winded way of saying, we're being proactive on staying ahead of changes in the interest rate environment. Loan to deposit ratio has now come down to 87.6, which is fairly low compared to I don't know Leslie, if you look back on what is our low point, but feeling very good about where loan to deposit ratio is from a liquidity perspective. NIBDA, as we had said to you last quarter, the last couple of quarters, we have had very, very strong growth. There is some seasonal trends in that.

Speaker 2

The trends go the other way for us in the second half. Average deposits NIDDA were down $93,000,000 sorry, dollars 64,000,000 Total deposits were are up 93 dollars Period end NIDDA was down $430,000,000 It's really made up of a number of things. One is some seasonality, especially in our title book, but also in our corporate book. Some of it is actually some deposit actions we took. We're trying to push out some very high priced, price sensitive deposits, which we were doing in the Q2.

Speaker 2

But it really while we took those actions in the Q2, the money didn't leave until the Q3. So it's a little bit of that. And I'm surprised to even be saying that still some move from DDA to money market this late in the game, but we saw some of that also happen. So all of that contributed to this, but what's important is really average NIDDA. There can be a lot of noise in our period end numbers.

Speaker 2

Average DDA was down $64,000,000 And despite that, our margin still went up 6 basis points. So we're very happy about that. Into the Q4, the seasonal headwinds will remain. We're expecting NIDD. Our best guess is that it will be flat.

Speaker 2

But we very much expect that to start growing again when the seasonal trends favor us in the Q1 and Q2. So the pipeline of new business that is coming in is still very robust. We're very happy with the business that we've closed this quarter and looking to close into the Q4. So loans were down $230,000,000 this quarter, mostly in the residential and in the franchise and leasing business as we've been driving those down for quite some time. Tom will get into the details of that in a little bit.

Speaker 2

In terms of credit, charge offs were again very, very low single digits. I think it was $6,500,000 let's be correct, dollars 6,500,000 for the quarter. We did build reserve again this quarter from 92, I guess not reserve, it's ACL, is up to 94 basis points. NPA did tick up a little bit. NPAs were 54 basis points, excluding the guaranteed portion of SBA loans, they were 31 basis points in June, excluding the SBA guaranteed portion.

Speaker 2

The 2 notable loans that moved into NPLs this quarter were in the C and I book. This is episodic. It does happen from time to time. We are adequately reserved for both these loans. They happen to be in 2 very different industries.

Speaker 2

It's just very unique to the situation that these borrowers are in. 1 is in the media space, the other is in the logistics space, but there is no trends anywhere in the portfolio that would suggest that this is something of that would repeat itself. Capital TCE, ETA went up to 7.6%, tangible book value continued to accrete up to $36.52 So pretty much good news on that front. We did have as you will remember earlier in the year, we hired Ernie Diaz, who now runs our small business, commercial and retail franchise. We made another significant hire this quarter, pretty late in the quarter in September.

Speaker 2

Beth Colson joined us. She's had a storied career at JP Morgan for 3 decades plus and a little bit of time at Wells Fargo as well. So she joined the team. We're very happy to have her here. I'm sure she'll make a big impact over the coming 3, 4, 5 years.

Speaker 2

Quickly, looking through my notes, yes, the hurricane, right? This is the quarter we unfortunately give you hurricane updates as well. We had 2 hurricanes blow through 1 in September, 1 in October, the 1 in September missed us for the most part. No damage to either our physical premises or the loan portfolio. Milton, which came by just last week, was closer to our footprint on the West Coast, but I'm happy to report that really did not do much damage.

Speaker 2

All our branches are back in business. All locations are reopened. We are coming through the loan portfolio to make sure that there is no impact. So far, we have not found anything, but the work is not complete. So over the course of next few days, we will comb through the entire portfolio and if there's anything, we'll give you an update.

Speaker 2

But as of right now, nothing to report back. This weekend, I got an email from our regulators asking for a bunch of detailed questions as they often do. And one question kind of stuck out and it was about Q4 of last year. It was about a small charge in our P and L and they asked me, could you walk us through what that was? And I just didn't remember what it was.

Speaker 2

So I called Leslie on Sunday and said, do you remember this? And she jogged her memory and she didn't remember it either. So I took it upon myself. I started pulling my files out to just go back and remind myself of where we were Q4, if I could find something to answer. Long story short, I still don't know what the answer to that $1,000,000 charge is and Leslie is going to take it from here.

Speaker 2

But it gave me an opportunity to I started reading a press release from 4 quarters ago. And as you can imagine, preparing for earnings for this call, we're deep in the numbers for what happened last 3 months. But this kind of broke that rhythm a little bit and forced me to look at where we were a year ago. And then I started looking taking a bigger picture. The more I looked at this, the better I felt.

Speaker 2

And I wrote down some just a few numbers over the last few quarters for myself and I want to share that on this call. And Leslie, you can correct me if I'm wrong anywhere. The key indicators of success really are EPS, margin, ROA, ROE and of course you have to keep an eye on credit and so on, right. So after March Madness, we embarked on the strategy of improving profitability through balance sheet transformation. I mean, if there's one sentence that describes what we've been trying to do over the last 6 quarters, it's basically this.

Speaker 2

So if I just go back and look at the last 4 quarters, our EPS has gone starting in Q4 of last year, dollars 0.62 then $0.69 then $0.72 and now $0.81 It's not on the back of buybacks or anything like that. This is just core performance. Our NIM has gone, again starting from Q4 of last year, dollars 2.60 to $2.57 to $2.72 to 2.78 dollars Our ROA was $0.52 Q4 of last year, then $0.59 then $0.61 then $0.69 We're still not there. We're this is not mission accomplished kind of thing. This is but it's a trajectory that made me feel good and I just wanted to share ROE similarly, it was 7.3, went to 7.9, went to 8, now it's 8.8.

Speaker 2

Again, we're not there yet, but we're moving in the right direction. And just to make a point, this is not off of the back of cost cutting. This is not off of the back of bleeding reserves. If anything, our ACL run from 82 to 90 to 92 to 94. We're building ACL, charge offs are low, almost too low for a commercial bank.

Speaker 2

And bit by bit, EPS is going up, margin is going up, ROE is going up, ROE is going up. So just I wanted to share that because it happened on Sunday when I was for a very different reason forced to go back and look at Q4 of last year, which I was not paying attention to and I thought I'd share that with you. The other thing I would say is we give you guidance every January. That's our best guess of where the year will be. Sometimes we're accurate, sometimes we're not.

Speaker 2

Last year, for example, we saw March Madness coming. So whatever guidance we gave you in January got shredded in March, thanks to Silicon Valley and a couple of other banks. But this year, the guidance we gave you is coming in just our results are coming in just in line with the guidance we gave you. We told you that we'll have double digit NIDDA growth. Well, as of right now, we're at about 11.7%.

Speaker 2

We told you that non brokered deposits will grow high single digits. I think we're at just over 8% right now. We said margin would grow and would get into the high 2s, while we're at 278 right now. Loans, we said will be high single digits. I think we're a little behind over there, but we have another quarter to go.

Speaker 2

We'll probably end up in the mid single digits. So it's kind of the opposite of last year where everything was going haywire. This year, everything is falling into plan and everything is steadily increased. And by the way, I also want to make a point, these improvements are not done artificially. This is not by some big restructure of the balance sheet and magically your numbers look better than next quarter.

Speaker 2

We didn't do any of that. We just took a sustained long term approach to this, improve the balance sheet left side, improve the balance sheet right side, keep your expenses in check, let's keep credit in check and the profitability will take care of itself, not immediately, but over time. And I'm very happy to see where everything is coming out. And but I just wanted to share that we often get lost in just 1 quarter, but it's important to kind of pull back and look at 2, 3, 4 quarters. So but with that, Rant, I will turn it over to Mr.

Speaker 2

Cornish.

Speaker 3

Thank you, Raj. Just for the record, I didn't remember the $1,200,000 either. So

Speaker 4

all 3 of the I searched for it and couldn't find it. So I don't know what they're talking about.

Speaker 2

I'm sure we'll find it.

Speaker 3

So a little more color on different parts of the business. First, we'll start with loans. As Raj mentioned, in total loans were down $230,000,000 this quarter. CRE grew by $34,000,000 while C and I declined by $112,000,000 mortgage warehouse was up $33,000,000 while resi franchise equipment and municipal finance were down a combined $185,000,000 which is all generally in line with those businesses what we're strategically looking at and have been doing for the last several quarters. Year to date, the C and I and CRE portfolios are up a combined $286,000,000 mortgage warehouses up $139,000,000 residential is down $422,000,000 and franchise equipment and municipal finance declined by a combined $238,000,000 So all pretty much consistent with the repositioning strategy on the left side of the balance sheet.

Speaker 3

Maybe a little bit more color on the commercial loan piece, which as Raj noted is a little bit lighter so far this year than we originally forecast. Although we're still I think expecting an overall solid mid single digit year of growth. If you look at in a few components, I think our kind of baseline business has pretty much performed consistent with our early conviction in the year. I think if you look, for example, in this quarter, our commitments and things like manufacturing and wholesale trade and construction and some other areas that I would kind of call the core daily C and I business was up for the quarter nicely and continued to perform well. What's been a little bit less than our original predictions this year or some of what I would call the more market sensitive areas, things like capital call lending and issues like that.

Speaker 3

And it's not been so much that the demand has not been there overall from a market perspective, but we have a fairly disciplined view on risk ratings, rate adequacy and things of that nature. And when that business is there, we take advantage of it. And when it's not there, we typically pass. So in some of those business categories, we've just not seen the right blend of rate structure, credit quality and whatnot. So our performance there has been a bit lighter than we originally planned.

Speaker 3

But in our core business area, I think it's been pretty good. Production has been pretty good all year long, particularly in the corporate banking area for the year. The second piece of it is the CRE pipeline started out originally at the beginning of the year, a bit slower. It's been interesting to watch this year, each quarter, our production has improved and we're expecting a pretty good Q4. We're starting to see, as rates tick down, as capital is available in the CRE segment, we're starting to see kind of much better production in pipeline as we get to the end of the year.

Speaker 3

I think for both of those businesses and all of our C and I related businesses, whether it's corporate, commercial, small business, I think we'll see the strongest production numbers in the Q4 that we've seen all year. 4th quarter is typically our strongest quarter and I think the pipelines in all the areas are looking good. We did see in Q3 a higher level of payoffs than we normally see. That kind of comes with the game. I mean, some quarters are lower than we think, some quarters are what we think and some quarters are above what we think.

Speaker 3

Most of that had to do with either company sales, which is pretty hard to predict or credits that we took a proactive position at renewals or at upsizing and elected to step out of for various reasons, either relationship reasons or pricing reasons or the fact that we had a slightly different view of the structure of the credit, what the economic outlook would be for those. But overall, I think as we head into Q4, we're very optimistic about what we're seeing. The markets we're in continue to be strong. We've continued to add talent in virtually all of the geographies and verticals that we're in. The ones that Raj mentioned from a talent acquisition perspective earlier are a little bit more of the headline ones, but a couple of levels below that at the relationship manager level, at the practice leader areas.

Speaker 3

We've continued in all of our groups and all of our geographies to hire and Q3 was good hiring quarter for us. A little bit more specifically on Cree, given the interest in this topic, I'll spend a few minutes going into this a little bit more. I would also refer you to Slides 11 through 14 of the supplemental deck where we've provided some additional detailed disclosure. Overall, the CRE portfolio continues to perform well. Our CRE exposure remains modest compared to other peers at 25 percent of total loans, CRE to risk based capital is 164%, comparatively based upon the June 30, 2024 call reports, the median level of pre for total loans for banks in the $10,000,000,000 to $100,000,000,000 space was 35% compared to our 25% and the median pre ratio to risk based capital was 220% compared to our 164%.

Speaker 3

So it's a good business line for us. It's important, but overall it's more modest within our balance sheet than it is for some other banks on a big picture basis. At September 30, the weighted average LTV, a degree portfolio was 55% and the weighted average debt service coverage ratio was 1.77%. 56% of the portfolio was in Florida, 25% in the New York Tri State area and 19% in other geographies that we're active in. Office continues to be the sector we're watching most closely.

Speaker 3

As I say at every call, I have every office loan in front of me right now and we're watching it very carefully. We are seeing some improvements in the sector, but overall the demographics of office and how it will play out and return to office is still a developing story at this point. For our portfolio, we have a total office portfolio of $1,800,000,000 with 57% in Florida, which is predominantly suburban, 23% in the New York Tri State area. Of that $1,800,000,000 $352,000,000 of total CRE is in the medical office space, which is a very high performing segment right now. So our traditional office portfolio is just south of $1,500,000,000 For the total portfolio, the weighted average LTV of the stabilized office portfolio was 65% and the weighted average debt service coverage ratio was 1.56 at September 30th.

Speaker 3

So well performing. Dollars 449,000,000 of office loans mature in the next 12 months, dollars 234,000,000 of that is fixed rate. Rent rollover in the next 12 months is only 11% of the office portfolio. So I think from a maturity and rollover perspective, we're in good shape. With respect to the New York Tri State portfolio, 41% is in Manhattan, approximately with approximately $169,000,000 95 percent occupancy and a lease rollover in the next 12 months is 10%.

Speaker 3

So I think they're well positioned as well. It's still early and there's a lot remaining to play out in the office sector broadly in our portfolio. So I would caution against over generalizing, but we are starting to see, particularly in Florida, some good consistent trends as it relates to quarterly upticks gradually in debt service coverage ratio numbers. We are starting to see a gradual narrowing of the gap between physical occupancy and economic occupancy as abatements and concessions start to roll up. And as you look at whether it's Miami or Fort Lauderdale or Orlando or Tampa, Jacksonville, particularly in Florida, we are starting to see some kind of quarterly gradual few basis points uptick in debt service coverage ratios kind of across the board.

Speaker 3

Overall, the office portfolio continues to perform comparatively well and is generally characterized by strong sponsors who continue to support the underlying properties. To date, any asset concerns are very specific to a small handful of loans and very manageable. Since the start of the pandemic in 2020, we've had total office charge offs of $8,300,000 related to 4 loans. Most of that was 2 loans that we took partial charge offs on last quarter and these are still in workout. Overall non performing CRE loans consisted of 5 loans totaling $61,000,000 against almost $6,000,000,000 portfolio as of September 30, excluding the guaranteed portion of SBA loans.

Speaker 3

Of the $61,000,000 $52,000,000 were in the office segment. So as you can see, the remainder of the segments we're in has virtually no non performing loans. So overall, we feel pretty good about where we are from a CRE perspective. That's a lot of detail, but Leslie will now get into more detail around the quarter.

Speaker 4

Thanks, Tom. So as Raj said, net income for the quarter was $61,500,000 or $0.81 per share. Net interest income was up $8,100,000 or 4% this quarter and the NIM increased 6 basis points to 2.78% from 2.72% last quarter, right in line with our expectations. The yield on loans was up from 5.85% to 5.87% as new production continues to come on at higher rates and lower yielding loans paid down. Yield on securities was up 2 basis points quarter over quarter as well.

Speaker 4

So at September 30, the commercial portfolio was 68% floating and the securities portfolio was 70% floating. Obviously, those assets will reprice down as rates come down, but that impact will be partially offset by the remixing that continues in the portfolio and the fact that fixed rate assets that mature or pay down are still being replaced by higher yielding assets. The rates on our commercial production for Q3 averaged a little over 8% for C and I and around 7.5% for CRE. We're very happy to see the average cost of total deposits actually declined this quarter, as Raj said, from $309 to 306 and on a spot basis down to 293 from 309 and that downtrend is continuing. We've been very proactive in bringing deposits rate down deposit rates down from September 1 through October 11.

Speaker 4

No magic to that date. It's just when we did the math. The beta on the non maturity interest bearing book was 78%. So that's a really, really good start on bringing deposit rates down and we will continue to bring rates down over Q4. For example, we've got about $1,700,000,000 in CDs maturing in Q4 at a weighted average rate in the low fives that will reprice down on average, we believe into the low 4s.

Speaker 4

So that's just an example of the progress that we're making there. In terms of guidance around the NIM, I expect the NIM for Q4 to be roughly flat to Q3. Reason for tempering that previous guidance a little bit, a couple of things going on. We're at a little bit lower starting point than we thought we would be within IDDA and commercial loans. So there's a little bit of catch up that needs to happen there, but that's really a timing thing.

Speaker 4

And the rates are coming down or are forecasted currently to come down a little bit faster than we originally thought they would. So back to there just being a little time needed for catch up there. Looking forward on the NIM, as we've been saying all along, the trajectory in the future will be more dependent on our ability to continue the balance sheet transformation story and to continue the remixing on both sides than it will be on what the Fed does and the static balance sheet as it has been for some time remains modestly asset sensitive. Comment

Speaker 5

just

Speaker 4

a little bit briefly on wholesale funding. We did see an uptick this quarter. The increase you saw in FHLB advances was just really related to intraday cash management activities going on, on the last day of the quarter. It's also reflected in elevated cash balances and that will normalize. We leaned into broker deposits a little more this quarter, frankly, because of some dislocation in market pricing and they were priced well inside of retail CDs.

Speaker 4

So that was I'm sure that's temporary and it will resolve itself over time, but we took advantage of it while it lasted. If I look back, the funding profile of the company has improved considerably over the course of the year. For the 9 months ended September 30, wholesale funding is down by $1,900,000,000 non brokered deposits have grown by $1,700,000,000 and NIDDA has grown by $800,000,000 So the story, if you look if you take a little bit longer than a 1 quarter view is a very good one. With respect to the provision and reserve, the provision this quarter was $9,000,000 the ACL to loans ratio up from 92 to 94 basis points and the commercial ACL ratio including C and I, CRE, Franchise and Equipment Finance was 141 at September 30. This quarter the provision a few different moving parts in there, some changes in portfolio characteristics and some assumption changes as well as additional qualitative reserves served to increase the reserve and that was partially offset by an improving economic forecast.

Speaker 4

Slide 16 of the supplemental deck gives you some more detail around that. The reserve on CRE office was 220 at September 30, that's down from 247 at June. This really related primarily to a reduction in specific reserve for one loan where we had an updated valuation come in much more favorably than we expected. So that was very good news in the office portfolio. And that's also what led to the overall reduction you see in the pre reserve.

Speaker 4

With respect to reserving around Hurricane Milton, as Raj said, the assessment is still ongoing. We currently don't expect anything material, but there could be some provisioning next quarter, but not expected currently to be material. Non interest income and expense, nothing particular to note with respect to non interest income, nothing material going on in there this quarter. You saw the increase in non interest expense and that was mainly on the comp line. And we can all celebrate the fact that the biggest driver of that was an increase in the company's stock price, which led to an increase in some of our share based compensation accruals.

Speaker 4

We hope that happens every quarter. And I'm sure you do as well. We previously guided to non interest expense being up mid single digits for the year ignoring the FDIC special assessments. That guidance hadn't changed. One thing we do expect next quarter is about $8,000,000 in railcar retrofit costs and that will push that guidance maybe towards the higher end of what you might define as mid single digits.

Speaker 4

I think the other thing in terms of guidance I'll throw out there is NIDDA. We're currently expecting maybe slightly down in the Q4 on NIDDA.

Speaker 2

Flat to slightly down.

Speaker 4

Flat to slightly down.

Speaker 2

Yes. But then growing again in the first half of

Speaker 5

next year.

Speaker 1

Yes.

Speaker 4

And continue to expect the ETR to be around 26.5 percent going forward. I will end my remarks there and turn it back over to Raj for closing remarks and then we'll take your questions. Yes.

Speaker 2

I just realized I forgot to mention the numbers I rattled off on EPS ROA, ROE over the last 4 quarters exclude the FDIC special assessment. I don't want to be in trouble with my CFO after the meeting. So I was supposed to mention that in my remarks, but I forgot, I apologize. But it's adjusted for the special assessments in the Q4 and Q1. But now, we'll open it up for questions.

Operator

Thank you. Our first question coming from the line of Benjamin Gilliam with Citi. Your line is open.

Speaker 2

Hey, good morning, everyone.

Operator

Hi, Ben. Hi, Ben.

Speaker 6

You guys gave guidance at the very end and I scramble. So writing it down quick, so I just want to make sure I had it all. So you said margin roughly flat next quarter, non interest bearing, probably a little bit softer due to seasonality trends. And then you also said there was an expense for railcars. I'm assuming that expense is one time in nature?

Speaker 4

It's sporadic or periodic in nature is what I would call it.

Speaker 6

Okay. That's fair. And I know you don't want to give 25 guidance. So

Speaker 4

when you

Speaker 6

think about just kind of the quarterly or kind of seasonality cadence of the non interest bearing deposits, is it kind of round to the calendar into 2025? Do you think it kind of follows the normal mortgage where it's like the first half of the first quarter is still pretty weak as well? Or do you think there's a little bit more idiosyncratic points you made? And I get that lower interest rates if we do get a couple of cuts here and then early in 1Q kind of throw seasonality into the loop. But I'm just trying to figure out the how you guys are thinking about the non interest bearing deposits?

Speaker 6

Because you've had tremendous success, but you're also facing the tougher part of a calendar. So just kind of curious your thoughts over the next quarter?

Speaker 2

In our I think you're accurate for our title business, but then there is a lot of business outside of the title space. And each one of those business lines has their own cadence, may not be as choppy as the title business, but whether it's our corporate business, whether it's the HOA or small business, they all follow a slightly different pattern. NTS, our title business certainly is the most has the biggest swings from month to month or quarter to quarter. And you're correct for that business, it starts picking up mid Q1 and it peaks in the summer because it's very driven by purchase money. So overall, I think expecting Q1, Q2 to be our strong quarters for NIDDA growth and 3rd Q4 not so strong is probably accurate.

Speaker 2

So kind of the pattern that we are seeing this year should be the pattern going forward, unless there is some kind of a big mortgage sort of market turn, it can only turn to our favor because it's already a pretty historic low. So if it turns turn then that will be sort of gravy on top, but we're not sort of sitting here and counting on that.

Speaker 3

But I did want to add one comment on your railcar question. The recertification and retrofit expense is generally one time for all of the railcars we're looking at. We had identified the expenses required to do that. Some of that happened last year. Most of it is this year.

Speaker 3

There's a small amount of it next year. And then we're pretty much done at that point with all the federally mandated recertifications and retrofitting that we need to do. It doesn't

Speaker 4

It's one time per car, but it doesn't all happen in the same quarter necessarily. Right. But

Speaker 3

it's identified and we know when we have to do it. It's not like it just sort of pops up.

Speaker 6

Got you. Okay. That was about as clear as mud, but I appreciate the color.

Speaker 4

Good job, Bob.

Speaker 3

Well, I tried.

Speaker 2

And then my other question,

Speaker 6

I know, Raj, you talked through like earnings have improved, reserve has improved, interest bearing or NIB deposits have improved, capital has also improved. And it seems like loan growth is going to be similar to the rest of the industry a little bit softer, but it should improve with lower rates and help your both sides of the balance sheet. So kind of just curious your thoughts on just capital deployment here, I guess, during capital CET1 has gone up pretty healthy and it doesn't seem like you have a tremendous amount of growth on the near term, but the outlook looks pretty healthy considering Florida is a great economic state. Thoughts on buyback or capital deployment going forward?

Speaker 2

Yes. So actively in discussion right now on that topic. We're in capital planning, budgeting mode as we speak. Over the course of next 2 months, it's going to be intensive dialogue on that front. We did talk to the Board about this as recently as our last Board meeting, which was August.

Speaker 2

And at that time, they decided to not authorize a buyback, but to reconsider it again at the end of the year. Capital is building up, but it's building up slower than usual because the balance sheet is changing. And CET1, 1, given that we're leaning on commercial growth and running our residential, that does eat up some capital. Yes, we have some cushion, but I'd rather deploy it for growth. I know right now this quarter certainly there wasn't growth, but I'm a little more optimistic about growth next year.

Speaker 2

But if we're not able to, then yes, we will look at share buybacks as a way to return capital. Also in terms of pre pandemic or pre the crisis last year, what used to be acceptable levels of capital like a 10% set one, I think that has been reset industry wide to a slightly higher expectation, maybe more like 11%. So if you think about that, yes, we do have excess capital, but it's not like oodles and noodles of excess capital. And if we can deploy it in growth, that would be my top choice. If not, we'll look to doing a buyback next year.

Speaker 7

Got you. That's helpful. Thank you.

Operator

Thank you. And our next question coming from the line of Wudi Lay with KBW. Your line is open.

Speaker 8

Hey, good morning guys.

Speaker 6

Good morning, Wudi.

Speaker 8

Had a quick follow-up on the non interest bearing deposit guidance. Is that referring to the end of period deposits or is it referring to the average basis?

Speaker 4

Really probably both, Woody. I would say flat to slightly down on both counts.

Speaker 8

Okay. Got it. And then I wanted to shift it over to credit. Looking at Slide 22, it looks like there was a pickup in some of the CRE past due buckets. Is there anything to note there or is that mostly just administrative issues?

Speaker 4

Just the past due, Honestly, that's a loan that's been in non accrual for some time now that finally just actually went past due.

Speaker 6

Got it.

Speaker 5

Okay.

Speaker 8

And then maybe shifting over to the office segment that's being criticized right now. I know there was some movement back in the Q1 and I believe we talked about how those loans were moved because of some of the 12 month lease concessions. Is the expectation still that those loans will be upgraded once the concession expires? Yes.

Speaker 4

Once it expires and rent has been collected for a period of time. Yes.

Speaker 8

Got it. All right. That's all for me. Thanks.

Operator

Thank you. And our next question coming from the line of Jared Shaw with Barclays. Your line is open.

Speaker 5

Hey, good morning. Just looking at the deposit cost trends, or actually maybe just the broader funding cost trends, how should we be thinking about the duration of the FHLB borrowings that you added and the duration of the broker deposits for one part of that? And then the other is when you're looking at the ability to reprice deposits lower from this first rate move, is that moved in line with your expectations? Or has pricing been a little stickier than maybe you initially thought?

Speaker 4

I'll take the first part of that and then I'll turn it over to Raj for the second part. The increase in FHLB advances what we put on is all very short because we expect that to be temporary. The duration of the broker, it's mostly 6 months, Bonnie.

Speaker 2

Yes. I'd say all CDs are fairly short, whether retail or brokered. In terms of deposit pricing, has it been sticky or not? It actually has been for this first cut that happened. We came out exactly where we modeled, right.

Speaker 2

So Leslie mentioned the beta was 78% or so. I think we were modeling 75%. So it was pretty close to what our expectation was. We'll see. This is not the last cut, this is the first cut and we'll see how the market evolves as the Fed moves on.

Speaker 2

But so far, I'm actually optimistic that we will be able to bring down and the market will accept that level of price decrease or the rate decrease.

Speaker 4

We haven't really seen outflows that seem to be prompted by the rate decrease and haven't heard a lot of pushback. Yes.

Speaker 5

So when we look at the discussion around margin being relatively flat versus the prior guide for ending the year closer to the high 2s, What's driving, I guess, that incremental pressure? Is that more just the DDA balances being lower than expected? Or is that rates on yields?

Speaker 4

Now the primary driver, there's a lot of moving parts obviously in the margin, but the primary driver is just the lower starting point than we expected with NIDDA. So like I said, we just got some catch up to do.

Speaker 2

Yes. Our margin obviously directly related to our NIDDA. NIDDA gets if you grow that margin will grow. And NIDDA does follow that pattern. So margin growth will not be in a straight line, but it will grow over time as it has over the last 12 months.

Speaker 2

So, dollars 100,000,000 of NIDDA produces $5,000,000 of earnings. It's very powerful, which is why we're focused so much on NIDDA growth. But the fact that margin is expected to be flattish is directly linked to the fact that NIDDA is expected to be flattish for the next 3 months.

Speaker 5

Okay, thanks. And then just finally for me, I think Tom was mentioning the pay down the level of pay down activity versus the strength of the pipeline in Q4. Maybe could you just revisit that in terms of, do you expect still high levels of pay down activity for the foreseeable future? Or were you saying that the pipelines are starting to build stronger levels than expected pay downs on this, I guess, and that's on the CRE side?

Speaker 3

I would say the latter would be true. We would expect the production will outdistance payoffs. Payoffs when people sell businesses is always very difficult to predict because they typically don't tell you until a few days before because there's a lot of sponsor activity and sponsors don't tend to release that information. But I would say if you looked at the payoff level for Q3, it was higher than it's been in past quarters and we would not expect that to be a normalized level. There are some normal levels that we will see from time to time, but we would expect that to be a higher level than we would see going forward.

Speaker 3

But we would expect the production in Q4 will certainly be the highest we've seen this year.

Speaker 4

To reiterate, I think for the full year, we should still land at mid single digit growth for the core commercial and free portfolios combined.

Speaker 5

Okay, great. Thanks.

Operator

Thank you. And our next question coming from the line of Timur Bessler with Wells Fargo. Your line is open.

Speaker 9

Hi, good morning. Again, just circling back to the margins commentary, I'm just wondering how that translates over to NII. Should we extrapolate that flattish margin means flattish NII or do we get maybe some uptick on the volume side given some of the strength in the lending pipelines?

Operator

I mean, I think

Speaker 4

we should probably see for the full year mid single digit growth in NII as well. So I think there'll be some benefit in the Q4 from the loan growth that we're anticipating, but I still think for the full year, we're probably looking at mid single digit

Speaker 9

growth in II. Okay.

Speaker 5

And then sorry, what was that?

Speaker 2

Go ahead.

Speaker 9

Raj, just going back to your comments on where the bank has come over the last 4 quarters or so. I guess maybe taking a step back into the transformation on both sides of the balance sheet, what inning are we in there? And then as you look at the end game in terms of either ROA or ROE, where do you see BankUnited eventually emerging on those fronts?

Speaker 2

I think we're somewhere in the middle of the game. We're not in the very early innings. I think that was probably at the beginning of this year or late last year. And we're not clearly not in the towards the end of the game. There's still a lot of work to be done.

Speaker 2

I think this transformation, we need to get our NIDDA up back out over 30% and maybe even dare to shoot for much higher than that. The 69 basis points ROA or the 8.8% ROE is nowhere near where I think the franchise is capable of. I think these numbers need to get over 1% and over certainly over 10%, 11%, 12% range for ROE. That again will not get done in the next 1 or 2 quarters. It is I think just if you just see what the trajectory has been and if we just draw the line from there, it is going to take a better part of next year to get up there.

Speaker 2

We'll give you more guidance in January when we have kind of gone penciled down on our budgeting and everything. But to your original question, I think we're kind of in the middle of the game, not at the beginning, not the first inning, not at the 8th or 9th inning. So there's still work to be done here.

Speaker 9

Great. And then just last for me on the bond book. Can you just remind us what majority of that is indexed too?

Speaker 2

It's a mix, yes.

Speaker 4

Yes. There's a lot of variety in terms of what the benchmark rates and timing of rate changes are in the bond book. It's not one thing. The loan book is mostly 1 month silver, but there's quite a bit more variety in the bond book in terms of the benchmark and frequency.

Speaker 5

Okay. All right. Thanks for the color.

Operator

Thank you. Our next question coming from the line of David Rychester with Compass Point Research. Your line is open.

Speaker 10

Hey, good morning, guys.

Speaker 4

Hey, good morning.

Speaker 2

On the title business, how much

Speaker 10

did those deposits decline this quarter? And where do those sit at quarter end or for the average balance? Whatever you guys have would be great.

Speaker 2

I think a third of that had four $30,000,000 decline was from the title business roughly.

Speaker 10

Okay. And about where those deposits sit now on a total?

Speaker 4

I've got somebody looking that up, Dave. I'll give right back

Speaker 9

to you.

Speaker 10

Okay. Not a problem. How was the customer growth this quarter in that business? I know you talked about like 40 to 45 customers per quarter. How does that look?

Speaker 2

I think if I recall, I think it was 38 customers or relationships that are brought in. I could be off by 1 or 2, but we actually just this Saturday took the entire team out to celebrate getting to 1,000. We're actually just a couple of shy from 1,000, but we're about to get to 1,000 relationships sometime in this month or maybe next month. So yes, last quarter was as very much in line with the previous quarters. I think it was about 38 new relationships.

Speaker 3

Generally, it's in that 38 to 45 area.

Speaker 7

Yes.

Speaker 10

Okay. How about that, the large customer you guys got back in 2Q? I know those deposits weren't at the bank in 2Q. Are they there now?

Speaker 2

Not yet. The implementation is much more complex. So that is actually a pretty we know we have won the business, but it's going to take time and that's going to be we're going to be doing the conversion over the course of next year.

Speaker 10

How large of an ad can that be on the deposit front?

Speaker 2

It's fairly big. It is it can easily bring in a couple of $100,000,000

Speaker 10

Is there once you guys onboard them and show that you're successful in integrating everything that they're doing, is there a way that you could potentially win more larger clients like this?

Speaker 2

I actually I like the smaller client nature of this business. Big clients, complex clients are fine, but the magic to this business is that the average client size is only $3,000,000 And I want to keep it like that because that's where you have you're getting paid for service rather than it being a price game. So I've asked the team to stay focused on the small end rather than go for the easy sort of big clients that can move the needle very quickly.

Speaker 4

That was also the big learnings from March of 2023.

Speaker 3

Yes. And then in this particular relationship that we're talking about, part of the complexity is it's really not per se one relationship. It's a large entity that owns 100 of underlying entities in Ethan. So each one is actually its own separate business, which leads to the complexity of trying to onboard this.

Speaker 2

Yes, which is why it will take a long time to bring every one of those entities on. It's like it's not one big conversion, it's multiple conversions.

Speaker 10

Yes. Okay. Just switching to expenses, what was the comp component from the stock price move this quarter? And do you have a sense for the dollar amount of the railcar expense you can see in 4Q?

Speaker 4

The dollar amount of the railcar expense is probably going to be about $8,000,000 in 4Q and it was a little over 2 in 3Q. So increase there of a few $1,000,000 Total increase in comp was $6,200,000 and I don't have the exact amount, but the vast majority of that $6,200,000 was stock price as well as some. We also increased our incentive compensation accruals.

Speaker 10

Yes. Our

Speaker 4

capital incentive compensation accruals. So those 2 things.

Speaker 10

So I'm just curious for the 4Q trend excluding that railcar expense bump up, are you thinking that expenses could be potentially flattish or maybe even down because you may have that roll off of the higher comp from the stock price move?

Speaker 4

What I will say to that is we haven't changed our full year guidance. We haven't moved off of that mid single digit mark.

Speaker 10

Okay, great. Maybe just one last one on the buyback. I was just curious what's holding the Board back? I know you've been asked this question every quarter and a lot of times you talk about the Board meeting that's upcoming and then the Board doesn't go for it. Is there anything any signpost they're looking at in this period where you are remixing and not necessarily aimed at growing the balance sheet?

Speaker 10

And I know you've talked about how CET1 at 11%, where 11% is like the new 10%, we're getting close to 12% now, so is 12% like the new 11%, how do you guys think about that?

Speaker 2

It's not the second level. It's not any one thing. It's a discussion is around just to give you context, for example. The August Board meeting was, I think, 3 days after VIX hit that 65 intraday. So when you go into a Board meeting and the market is going completely haywire, remember back in August, when we had that little temper tantrum in the market.

Speaker 2

So the Board meeting was literally 3 days after that. So the mood in the Board room was like, what is going on? What does this all mean? And so they're taking into account the market. They're looking at the uncertainty from the geopolitical situation that we're in.

Speaker 2

They're looking at also what kind of growth might be at our doorstep. So they're looking at the pluses and minuses and they're also saying, okay, if we do a buyback, how big is it going to be and how material will it be? And we show them the numbers, it's not like we can go out, do $300,000,000 $400,000,000 buyback. It's going to be small. And when you run through it and say, okay, so what is the bottom line EPS impact?

Speaker 2

And it's not much. So, in light of all of that, they say, well, let's wait, let's do your capital planning, come back to us and then we'll see if you want to do something.

Speaker 10

Okay.

Speaker 2

So it's not any one thing that they're solving for. It's a number of things, including the environment, including, what we think growth prospects might be, what the Fed is about to do, what will happen with elections, which all of that stuff goes into their that and they benchmark that against how much could we do and what impact will it have. And it's not really the bottom line on that sheet that we show them at the bottom is the EPS impact. And honestly, it's not that much.

Operator

All

Speaker 10

right. Great. Appreciate all the color. Thanks guys.

Operator

Thank you. And our next question coming from the line of David Bishop with Hovde Group. Your line is open.

Speaker 11

Hey, good morning. Hey, good morning. Hey, quick question, Roger, Tom. You noted in the slide deck, plenty of capacity to grow on the commercial real estate side. I think you're at 164 or so.

Speaker 11

You saw a little bit of uptick in multifamily lending this quarter. Just curious, do you have any sort of guidelines targeting specific ratio there? Just maybe curious what the comfort level is to grow that ratio?

Speaker 2

I don't think there's plenty of room to grow. It's not about can the 165 number go up to 185 or 200 whatever. We're not solving for that. There's plenty of room to grow. Where there is restrictions is, there are asset classes that we are not touching.

Speaker 2

So as an obvious one being office, nobody is touching office. So we're not going to grow that. Hospitality, also we're very careful and doing very few deals here and there, but not a whole lot. So you look at the avenues of growth, we have limited ourselves from a concentration perspective. That's where the restriction comes in, not at the total CRE level.

Speaker 2

There's lots of room at the total CRE level. There's no room in the office space. There's little to no room in hospitality. There's some room in warehouse and we're looking at some new asset classes like data centers where we haven't done a whole lot in the past. We might do a little bit in that space.

Speaker 2

But there are sub segments of CRE that are much more restricted rather than the total CRE.

Speaker 3

Yes. I would also add to that. Raj is 100% accurate. As you look at even what people think are the most favorite asset classes right now, which would generally be looked at as multifamily and industrial, The last 12 months to 18 months was pretty robust construction in both of those asset classes. We have seen upticks in vacancy rates in both of those areas.

Speaker 3

So while we like them a good deal, we are cautious when it comes to building these concentrations and ensuring that we're within the overall asset class segmentation strategy that we have and that's really the limiting factor rather than the sort of a big picture up number.

Speaker 11

Got it. And then Raj, I think you noted the preamble, pretty good line of sight into the non interest bearing DDA pipeline here. Even if you're flat, you're probably still looking at 11% to 12% growth rate this year. Do you feel confident you can maintain that level of growth into 2025 and perhaps even improve on that?

Speaker 2

Yes. We'll give you exact guidance in January, but looking at just where the pipeline stand right now, I feel pretty optimistic. Great. Thank you.

Operator

Thank you. And our next question coming from the line of Stephen Scout with Piper Sandler. Your line is open.

Speaker 7

Hey, good morning, everyone. Thanks for the time. One question on the expense growth in the quarter. It looked like occupancy and equipment saw a little bit of a jump here. Was there any sort of branch expansion or is there anything within that that's worth noting or is that, I

Speaker 2

the normal put or take?

Speaker 4

Sporadic repair and maintenance expenses in there. That's the increase in the year.

Speaker 7

Got you. So I mean is that something that should kind of normalize back down as a result or is that a decent run rate?

Speaker 4

I mean, I would look at maybe 4 trailing quarters as a decent run rate. I think it's dangerous whenever you look at any quarter and say that's the run rate.

Speaker 7

Yes, perfect. Very helpful lesson. And then as you're thinking about maybe the long term potential for the NIM as you work through continue to process through this balance sheet transformation and build up nonish bearing, etcetera, how do you think about that long term potential for where you could or would like to get the NIM over the next couple of years in a perfect growth?

Speaker 2

We have to get it over 3%, without changing the business model. If we decide to change the business model and take on a little more risk, then you can get much higher. But based on the current mix of business, this should be we're shooting for over 3%.

Speaker 7

Okay, great. And then maybe the last thing for me is just Raj, you talked a lot about the progress that's been made over the last 4 quarters last year. Directional trends look really good. I guess the one probably missing piece there is PPNR income is still down from this time last year. So what needs to happen to actually grow PPNR and kind of maybe fix that last piece of the puzzle?

Speaker 7

Do we need a BKU 3.0? Is that something that's on the table? Or how do we get that last piece there?

Speaker 2

I think it's growth, the balance sheet. The balance sheet is actually going to shrink this year a little bit, maybe 1% or so. And that is deliberate because we're busy kind of transforming it. But eventually, we have to get to growing it.

Speaker 4

I mean, it's revenue, Stephen. It's spread revenue and also incremental improvements in It's not a cost cut.

Speaker 2

Makes sense. All

Speaker 11

right, great. Thanks for

Speaker 7

the time guys. Appreciate it.

Operator

Thank you. Our next question coming from the line of Christopher Marinac with Janney Montgomery Scott. Your line is open.

Speaker 6

Hey, thanks. Good morning. Thanks for all the information this morning. I was just curious either from Raj or Tom about the potential for upgrades on credits and whether it's some lower interest rates or new tax information you have from borrowers, what's potential to see upgrades in some of the commercial lines that you disclosed?

Speaker 3

Yes. I think I'd split it into 2. I mean, 1, the CRE portfolio, we can kind of clearly get line of sight on upgrade potential, which we think is good because a good portion of it is tied to this rent abatement issue that we have in new leases that have been signed in office buildings. So I think it's either Leslie or Raj mentioned earlier. We do not count signed leases when there's physical occupancy until the 90 days after the rent is being paid.

Speaker 3

So we can kind of chart out property by property and look at it of those properties that have been downgraded. And we can almost say at this particular date, this is when we will start to count that rent being paid. So we have pretty good sideline and feel good about upgrades within the overall CRE portfolio because it's more systemic kind of in nature of what we're looking at. And the C and I portfolio, that's a little harder to say because every individual loan is in kind of a different industry segment, a different issue. It's a little harder to look at it in a very generalized manner.

Speaker 3

I would say we see some where we think there's good upgrade potential, somewhere management changes and business model changes are ongoing that may take a longer period of time and some of them may be more stuck where they are. I would say in general, lower rates will help everything. It'll help the C and I portfolio as well. It's harder to pick that. I would be optimistic about that.

Speaker 3

But in the CRE portfolio, it's much easier to have very direct line of sight and I would be more optimistic about that.

Speaker 6

Great. Thanks for that background. That's helpful. And Raj, just curious on your comments on the call about the regulatory inquiry over a weekend. That seems odd compared to what we've seen in the past.

Speaker 6

I guess that's just normal workflow.

Speaker 2

Well, I was on vacation last week, so I was catching up on my email over the weekend. That's all it was.

Speaker 6

Perfect. Thanks for qualifying that. Thanks again.

Speaker 2

Thank you.

Operator

Thank you. And our last question are coming from the line of Jon Arfstrom with RBC Capital. Your line is open.

Speaker 12

Raj on vacation before earnings. He's clearly comfortable.

Speaker 2

I was on vacation. It wasn't the hurricane hit the week I took off. So it was interesting from being the other side of the world dialing in and finding out what's going on with the hurricane. Not that I could do much about it.

Speaker 12

Right, right. Okay. Obviously, most of the questions have been asked and answered. But I did have a question on if you have any preferences for what the Fed does. It feels like the margin marches higher just based on what you're doing from a business point of view.

Speaker 12

And I understand the pause in the margin this quarter, I get that. But what is there anything that you would prefer the Fed does from a rate perspective?

Speaker 2

Not really. We've built our balance sheet in a way that it doesn't really impact us that much. Of course, if they move 100 basis points, 200 basis points and surprise everyone, that's not going to be good. But a gradual reduction in rates is what we're expecting and we'll be fine. I have a very long laundry list of what I'd like the fiscal side of the house to do.

Speaker 2

But on the monetary side, I really I think they've done a good job. I think they have a very difficult task ahead of them. I still remain afraid of that inflation might spark again next year based on all the spending and all the deficits we're talking about and all the giveaways that come about during election time. Hopefully, cooler heads will prevail next year and we will have more sort of responsible fiscal policy. But on the monetary side, I think they've done a good job.

Speaker 2

And I think if they just continue on a steady pace and not surprise the markets, I think we'll be fine.

Speaker 12

Okay. Okay. I'll leave it there. Leslie, I'll send you a couple of questions, but nice job. Thank you.

Operator

Thank you. And I'll now turn the call back over to Mr. Raj Singh for closing comments.

Speaker 2

All right. Thank you. Listen, we're happy where the quarter came out. We're happy that, like I said earlier in my remarks that everything has gone according to plan this year. It's rare that happens, but it has happened.

Speaker 2

And I'm very optimistic and excited about when I see what the next 2, 3 quarters will be and where we can take this franchise. So thank you for indulging us and listening to our story and we'll talk to you again in 90 days. Bye.

Operator

Ladies and gentlemen, that does not have conference for today. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
BankUnited Q3 2024
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