BankUnited, Inc. (NYSE:BKU) Q3 2024 Earnings Call Transcript

BankUnited, Inc. (NYSE:BKU) Q3 2024 Earnings Call Transcript October 22, 2024

BankUnited, Inc. beats earnings expectations. Reported EPS is $0.81, expectations were $0.73.

Operator: Good day. And thank you for standing by. Welcome to BankUnited’s Inc. Third Quarter 2024 Earnings Conference Call. All this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference is being recorded. I will now hand the conference over to your host, Jackie Bravo. Please go ahead.

Jacqueline Bravo: Good morning, and thank you for joining us today for BankUnited Inc.’s Third Quarter 2024 Results Conference Call. On the call this morning are Raj Singh, Chairman, President and CEO; Leslie Lunak, Chief Financial Officer; and Tom Cornish, Chief Operating Officer. Before we start, I would 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.

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 the company’s direct control, such as adverse events impacting the financial services industry. That 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. Information on these factors can be found in the Company’s annual report on Form 10-K for the year ended December 31, 2023, and any subsequent quarterly report on Form 10-Q or current report on 8-K which are available at the SEC’s website. With that, I would like to turn the call over to Mr. Raj Singh.

Raj Singh: 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 $61.5 million or $0.81 a share. 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? First and foremost is margin. We had guided to the fact that margin would be up, and it was up. Margin came in at 2.78%. I think last quarter, we were at 2.72%. So nice growth in margin. Actually, if I look from third quarter of last year to this, it is been a 9% increase in our margin.

So we are 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. The cost of deposits this quarter declined to 3.06% from 3.09% last quarter. Cost of interest-bearing deposits came down from 4.26% to 4.20%. Now remember the Fed move happened pretty late in the quarter. So if you want to see the better impact of all of that, you should look at our spot rate. And the portfolio APY on deposits on September 30 was 2.93%. On June 30, it was 3.09%. And if you look at just spot APY for interest-bearing, it came down from 4.29% in June to 4.01%. Even this doesn’t actually fully include the actions that we are taking on deposits because some of our deposit products get only priced monthly.

So the stuff that happened on October 1 is outside of that. So we are being long-winded, we are saying we are 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 was our low point, but feeling very good about where loan-to-deposit ratio is from a liquidity perspective. NIDDA, as we had said to you last quarter, the last couple of quarters, we have had very, very strong growth, some seasonal trends in that — the trends go the other way for us in the second half. Average deposits NIDDA were down $93 million — sorry, sorry, $64 million. Total deposits are up [$93 million] (ph). Period NIDDA was down $430 million.

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 second quarter, but it really — while we took those actions in the second quarter, the money didn’t leave until the third quarter. So it is 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. Average DDA was down $64 million.

And despite that, our margins still went up 6 basis points. So we are very happy about that. Into the fourth quarter, the seasonal headwinds will remain. We are expecting NIDDA — our best guess is that it will be flat. But we very much expect that to start growing again when the seasonal trends favor us in the first quarter and second quarter. So the pipeline of new business that is coming in is still very robust. We are very happy with the business that we’ve closed this quarter and looking to close into the fourth quarter. So loans were down $230 million 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.

In terms of credit charge-offs, we are again, very, very low. Single digits, I think it was $6.5 million, Leslie, correct? $6.5 million for the quarter. We did build reserve again this quarter from 92 — I guess, not reserved, it is 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 that are at 39 — there were 39 basis points in June, excluding the SBA guarantee portion. The two notable loans that moved into NPLs this quarter were in the C&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 two very different industries. It’s just very unique to the situation that these borrowers are in.

One 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/TA 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. Beth Hosen joined us. She’s had a storied career at JPMorgan for three decades plus and a little bit of time at Wells Fargo as well. So she joined the team. We are very happy to have her here. I’m sure she’ll make a big impact over the coming three, four, five years.

Quickly looking to – yes the hurricane, right? The quarter, we unfortunately give you hurricane updates as well. We had two hurricanes blow through, one in September, one in October. The one 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. 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 is anything, we’ll give you an update.

But as of right now, nothing to report back. This weekend, I was — I got an e-mail 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 fourth quarter of last year. It was about a small charge in our P&L and they asked me, could you walk us through what that was? And I just didn’t remember what it was. So I call Leslie on Sunday. I said do you remember this? And she jogged her memory and she didn’t remember it either. So I took it apart myself. I started pulling my files out to just go back and remind myself of where we were fourth quarter, if I could find something to answer. Long story short, I still don’t know what the answer to that $1 million charge is, and Leslie is going to take it from here.

But it gave me an opportunity to — I started reading a press release from four quarters ago. And as you can imagine, preparing for earnings for this call, we are deep in the numbers for what happened in the last three months. But this kind of broke that rhythm a little bit and force 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. 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, we 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 there’s one sentence that describes what we’ve been trying to do over the last six quarters, it’s basically this. So if I just go back and look at the last four quarters, our EPS has gone starting in fourth quarter of last year, $0.62 then $0.69 then $0.72 and now $0.81. It is not on the back of buybacks or anything like that. This is just core performance. Our NIM has gone, again starting from fourth quarter of last year, 2.60% to 2.57% to 2.72% to 2.78%. Our ROA was [0.52% fourth quarter of last year, then 0.59% and 0.61% then 0.69%] (ph). We’re still not there. This is not a mission accomplished kind of thing. This is — but it’s a trajectory that I — 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%.

Again, we are 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 leading reserves. If anything, our ACL went from [0.82% to 0.90% to 0.92% to 0.94%] (ph). We’re building ACL. Charge-offs are low, almost too low for a commercial bank. And bit by bit, EPS is going up, margin is going up, ROA 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 fourth quarter 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 are accurate. Sometimes we’re not. 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%. We told you that non-broker 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, well, we’re at 2.78% right now. Loans, we said will be high single digits. I think we are a little behind over there, but we have another quarter to go, we’ll probably end up in the mid-single digits.

So it is kind of the opposite of last year, where everything was going haywire. This year, everything is falling into plan and everything has steadily increased. By the way, I also want to make a point. These improvements are not done artificially. This is not by some big restructure in the balance sheet and magically, your numbers look better than next quarter. 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 our expenses in check. Let’s keep credit and 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 one quarter, but it’s important to kind of pull back and look at two, three, four quarters. So — but with that ran, I will turn it over to Mr. Cornish.

Tom Cornish: Thank you, Raj. Just for the record, I didn’t remember the $1 million too either.

Leslie Lunak: I searched for it and couldn’t find it. So I don’t know what they’re talking about.

Raj Singh: I’m sure we’ll find it.

Tom Cornish: 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 million this quarter. CRE grew by $34 million, while C&I declined by $112 million. Mortgage warehouse was up $33 million, while resi franchise, equipment and municipal finance were down a combined $185 million, 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&I and CRE portfolios are up a combined $286 million. Mortgage warehouse is up $139 million. Residential is down $422 million and franchise, equipment and municipal finance declined by a combined $238 million. So all pretty much consistent with the repositioning strategy on the left side of the balance sheet.

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 are still I think, expecting an overall solid mid-single-digit Europe growth. If you look at it 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&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 were some of what I would call the more market sensitive areas, things like capital call lending and issues like that.

And it is 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. But in our core business area, I think it is 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 is been interesting to watch this year. Each quarter, our production has improved, and we are expecting a pretty good fourth quarter. We’re starting to see, as rates tick down and as capital is available. In the CRE segment, we are starting to see kind of much better production and pipeline as we get to the end of the year. I think for both of those businesses and all of our C&I related businesses, whether it is corporate, commercial, small business, I think we’ll see the strongest production numbers in the fourth quarter that we’ve seen all year. Fourth quarter is typically our strongest quarter, and I think the pipelines and 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. 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 are very optimistic about what we are 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 are in. The ones that Raj mentioned from a talent acquisition perspective earlier, a little bit more of the headline ones, but a couple of levels below that at the relationship manager level and the practice leader areas.

We’ve continued in all of our groups in all of our geographies to hire, and Q3 was a good hiring quarter for us. A little bit more specifically on CRE. Given the interest in this topic, I will 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 provided some additional detailed disclosure. Overall, the CRE portfolio continues to perform well. Our CRE exposure remains modest compared to other peers, the 25% of total loans. Accretive risk-based capital is 164% comparatively based upon the June 30, 2024. All reports, the median level of CRE for total loans for banks in the $10 billion to $100 billion space. Was 35% compared to our 25% and the medium CRE ratio to risk-based capital was 220% compared to our 164%.

So it is a good business line for us. It’s important, but overall, it is 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 of the CRE 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 are active in. Office continues to be the sector we’re watching most closely. As I say it 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 $1.8 billion with 57% in Florida, which is predominantly suburban, 23% in the New York Tri-State area. Of that $1.8 billion, $352 million of total CRE is in the medical office space, which is a very high-performing segment right now. So our traditional office portfolio was just south of $1.5 billion. 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 30. So well performing. $449 million of office loans mature in the next 12 months. $234 million 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 are in good shape.

With respect to the New York Tri-State portfolio, 41% is in Manhattan, approximately — with approximately $169 million, 95% occupancy and a lease rollover in the next 12 months of 10%. So I think — are 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 overgeneralizing, 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 ratio is kind of across the board.

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 or 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 $8.3 million related to four loans. Most of that was two loans that we took partial charge-offs on last quarter, and these are still in workout. Overall non-performing CRE loans consisted of five loans totaling $61 million against almost $6 billion portfolio as of September 30, excluding the guaranteed portion of SBA loans. Of the $61 million, $52 million were in the office segment. So as you can see, the remainder of the segments we are 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.

Leslie Lunak: Thanks, Tom. So as Raj said, net income for the quarter was $61.5 million or $0.81 per share. Net interest income was up $8.1 million 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. 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&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 3.09% to 3.06% and on a spot basis, down to 2.93% from 3.09% and that downtrend is continuing. We’ve been very proactive in bringing deposits down — deposit rates down from September 1 through October 11. No magic to that date 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 $1.7 billion in CDs maturing in Q4 at a weighted average rate in the low 5s that will reprice down on average, we believe, into the low 4s.

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 are at a little bit lower starting point than we thought we would be within NIDDA and commercial loans. So there’s a little bit of catch-up that needs to happen there, but that’s really a timing thing. 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, then 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 just 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. 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 nine months ended September 30, wholesale funding is down by $1.9 billion.

Non-brokered deposits have grown by $1.7 billion. NIDDA has grown by $800 million. So the story — if you look — if you take a little bit longer than one quarter, view, it was a very good one. With respect to the provision and reserve, the provision this quarter was $9 million. The ACL to loans ratio up from 92 to 94 basis points. And the commercial ACL ratio, including C&I, CRE, franchise and equipment finance was 1.41% 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. Slide 16 of the supplemental deck gives you some more detail around that.

The reserve on CRE office was 2.20% at September 30. That’s down from 2.47% 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 CRE reserve. 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. So it’s 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. We hope that happens every quarter. And I’m sure you do as well. We previously guided to noninterest expense being up mid-single digits for the year, ignoring the FDIC special assessments. That guidance hasn’t changed. One thing we do expect next quarter is about $8 million in railcar retrofit costs. And that will push that guidance maybe to the — towards the higher end of what you might define as mid-single digits. 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 fourth quarter on NIDDA.

Raj Singh: Flat to slightly down. But then growing again in the first half of next year.

Leslie Lunak: Yes. And continue to expect the ETR to be around 26.5% 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.

Raj Singh: Yes. I just realized, I forgot to mention the numbers I rattled off on EPS, ROA, ROE over the last four quarters exclude the FDIC special assessment, I don’t want to be in trouble with my CFO after the meeting. I was supposed to mention that in my remarks, but I forgot, I apologize, but it’s adjusted for the special assessments in the fourth quarter and first quarter. But now we’ll open it up for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question coming from the line of Benjamin Gerlinger with Citi. Your line is open.

Ben Gerlinger: Hi, good morning everyone.

Leslie Lunak: Hi Ben.

Raj Singh: Hi Ben.

Ben Gerlinger: You always give guidance at the very end of that scramble. So writing it down quick, I just want to make sure I had it all. So you said margin roughly flat next quarter, noninterest-bearing probably a little bit softer due to some seasonality trends. And then you also said there was an expense for railcars, I’m assuming expense is onetime in nature?

Leslie Lunak: It is sporadic or periodic in nature is what I would call it.

Ben Gerlinger: Yes. Okay. That’s fair. And I know you don’t want to give ’25 guidance. So when you think about just kind of the quarterly or kind of seasonality cadence of the non-interest-bearing deposits, is it kind of around the calendar into 2025? Do you think it kind of follows the normal mortgage where it is 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 1Q kind of throw seasonality into the loop. But I’m just trying to figure out the how you guys are thinking about the noninterest-bearing deposits. Because you’ve had tremendous success, but you’re also facing the tougher part of the calendar. So just kind of curious, your thoughts over the quarter.

Raj Singh: 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 is our corporate business, whether it is the HOA or small business, they all follow a slightly different pattern. NTS, our title business certainly is the most — has the bigger swings from month-to-month or quarter-to-quarter. And you are correct for that business, it starts picking up mid-first quarter, and it peaks in the summer because it’s very driven by purchase money. So overall, I think expecting first quarter, second quarter to be our strong quarters for NIDDA growth, and third and fourth quarter, not so strong is probably accurate.

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 does turn, then that will be sort of gravy on top, but we are not sort of sitting here and counting on that.

Tom Cornish: But I did want to add one comment on your railcar question. The recertification and retrofit expense is generally onetime for all of the railcars that 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. 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 –.

Leslie Lunak: It is onetime per car, but it doesn’t always happen in the same quarter necessarily. Yes.

Tom Cornish: But it’s identified, and we know when we have to do it. It’s not like it just sort of pops up.

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

Leslie Lunak: Good job, Tom.

Tom Cornish: Well, I tried.

Ben Gerlinger: And then my other question, I know, Raj, you talked through like earnings have improved. Reserve has improved. The 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, considering capital. CET1 has gone up pretty healthy, and it does seem like you have a tremendous amount of growth in the near term, but the outlook looks pretty healthy considering Florida is a great economic state. Also, on buyback or capital deployment going forward?

Raj Singh: So actively in discussion right now on that topic. We are in capital planning, budgeting mode as we speak. Over the course of next two months, it is 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. 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, given that we are leaning on commercial growth and running of 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.

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 prices last year, what used to be acceptable levels of capital like a 10% CET1, 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 oodles 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.

Ben Gerlinger: Got it. That’s helpful. Thank you.

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

Woody Lay: Hi, good morning guys.

Leslie Lunak: Good morning Woody.

Woody Lay: I had a quick follow-up on the noninterest-bearing deposit guidance. Is that referring to the end-of-period deposits? Or is it referring to the average basis?

Leslie Lunak: Really probably both, Woody. I would say flat to slightly down in both counts.

Woody Lay: Okay. Got it. And then I wanted to shift 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?

Leslie Lunak: 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 through. So –.

Woody Lay: Got it. Okay. And then maybe shifting over to the office segment, I think criticized right now. I know there was some movement back in the first quarter, 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?

Tom Cornish: Yes.

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

Woody Lay: Got it. All right. That’s all from me. Thanks.

Operator: Thank you. Our next question coming from the line of Jared Shaw with Barclays. Your line is open.

Jared Shaw: Hi, 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 move in-line with your expectations? Or has pricing been a little stickier than maybe you initially thought?

Leslie Lunak: 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 six-month money.

Raj Singh: I’d say all CDs are fairly short whether retail or broker. 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? So Leslie mentioned the beta was 78% or so. I think we are 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. 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. So — or the rate decrease.

Leslie Lunak: We haven’t really seen outflows that seem to be prompted by the rate decrease and haven’t heard a lot of pushback.

Jared Shaw: Yes. 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 — is that more just the DDA balances being lower than expected? Or is that rates on yields?

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

Raj Singh: 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. So $100 million of NIDDA produces $5 million of earnings. It is very powerful, which is why we are 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 three months.

Jared Shaw: Okay. And then just finally for me. I think Tom was mentioning the pay down — the level of paydown activity versus the strength of the pipeline in the fourth quarter. Maybe could you just revisit that in terms of do you expect still high levels of paydown activity for the foreseeable future? Or are you saying that the pipelines are starting to build stronger levels than expected paydowns? I guess, and that’s on the CRE side?

Tom Cornish: 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 is 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 is 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, but we would expect the production in Q4 will certainly be the highest we’ve seen this year.

Leslie Lunak: Yes. To reiterate, I think for the full year, we should still land at mid-single digit growth for the core commercial and CRE portfolios combined.

Jared Shaw: Okay. Great. Thanks.

Operator: Thank you. Our next question coming from the line of Timur Braziler with Wells Fargo. Your line is open.

Timur Braziler: Hi, good morning. Again, just circling back to the margin 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?

Leslie Lunak: I mean, I think 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 fourth quarter from the loan growth that we’re anticipating. But I still think for the full year, probably in a mid-single digit growth NII.

Timur Braziler: Okay. And then — sorry, what was that?

Raj Singh: Sorry, go ahead.

Timur Braziler: Raj, just going back to your comments on where the bank has come over the last four 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 endgame in terms of either ROA or ROE, where do you see BankUnited eventually emerging on those fronts?

Raj Singh: I think we are 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 towards the end of the game. There is still a lot of work to be done. I think this transformation, we need to get our NIDDA up back out over 30% and maybe even there 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 one or two 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.

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 eighth or ninth inning. So there is still work to be done here.

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

Raj Singh: It’s a mix.

Leslie Lunak: Yes. There is a lot of variety in terms of what the benchmark rates and timing of rate changes are in the bond book. It is not one thing. The loan book is mostly one month SOFR. But there is quite a bit more variety in the bond book in terms of the benchmark and frequency.

Timur Braziler: Okay. Great. Thanks for the color.

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

David Rochester: Hi, good morning guys.

Raj Singh: Hi, David.

David Rochester: On the title business, how much do those deposits declined this quarter? And where do those sit at quarter end or for the average balance? Whatever you guys have would be great.

Raj Singh: I think 1/3 of that $430 million decline was from the title business roughly.

David Rochester: Okay. And about where those deposits sit now?

Leslie Lunak: I’ve got somebody looking that up, Dave, I’ll get right back to you.

David Rochester: No 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?

Raj Singh: 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 are actually just a couple of — a couple 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 very much in-line with the previous quarters. I think it was about 38 new relationships.

Tom Cornish: Generally, it’s in that 38 to 45 area.

David Rochester: 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?

Raj Singh: 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 are going to be doing the conversion over the course of next year.

David Rochester: How large of an add can that be on the deposit front?

Raj Singh: It’s fairly big. It is — it can easily bring in a couple of hundred million bucks.

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

Raj Singh: 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 million. 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.

Leslie Lunak: That was also the big learnings from March of 2023.

Tom Cornish: Yes. 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 hundreds of underlying entities beneath. And so each one is it’s actually its own separate business, which leads to the complexity of trying to onboard this.

Raj Singh: Yes, which is why it will take a long time to bring every 1 of those entities on. It’s like — it’s not 1 big conversion. It’s multiple conversions.

David Rochester: Yes. Okay. Just switching to expenses. What was the comp component from the stock price move this quarter? Do you have a sense for the dollar amount of the railcar expense you could see in 4Q?

Leslie Lunak: The dollar amount of the railcar expense is probably going to be about $8 million in 4Q, and it was a little over $2 million in 3Q. So increase there of a few million dollars. Total increase in comp was $6.2 million, and I don’t have the exact amount, but the vast majority of that $6.2 million was stock price as well as some — we also increased our incentive compensation accruals. So those two things.

David Rochester: 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 — on the stock price move?

Leslie Lunak: Yes. 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 so–.

David Rochester: Okay. Great. Maybe just one last one, the buyback. 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 talked 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? And I know you’ve talked about how CET1 at 11%, where 11% is like the new 10%, and we are getting close to 12 now, so is 12%, like the new 11%? How do you guys think about that?

Raj Singh: It’s not the second level. And it is not any one thing. It’s a discussion is around — just to give you context, for example the August Board meeting was, I think, three days after VIX hit that 65 intraday. So when you go into a Board meeting and the market is going completely haywire, I remember back in August when we had that little temper tantrum in the market. So the Board meeting was literally three days after that. So the move on the boardroom 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. 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 million, $400 million buyback. It is going to be small. And when you run through it and say, okay so what is the bottom line EPS impact, and it is 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. So it’s not only 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 the elections. All of that stuff goes into 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 very bottom is the EPS impact.

And honestly, it’s not that much.

David Rochester: All 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.

David Bishop: Hi, good morning. Question, Raj or Tom. You note in the slide deck, plenty of capacity to grow on the commercial real estate side, I think you’re at [164%] (ph) or so. Saw a little bit of uptick in multifamily lending this quarter. Just curious, do you have any sort of guidelines? Are you targeting specific ratio there? Just maybe curious what the comfort level is to grow that ratio.

Raj Singh: I don’t think – there is plenty of room to grow. It’s not about kind of the [165%] (ph) number go up to [185% or 200%] (ph), whatever. We’re not solving for that. There is plenty of room to grow. Where there is restriction is there are asset classes that we are not touching. So as an obvious one being office. Nobody is touching office. So we’re not going to grow that. Hospitality, also, we are 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. There is lots of room in the total CRE level. There is 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. But there are subsegments of CRE that are much more restricted rather than the total CRE.

Tom Cornish: 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 booked at as multifamily and industrial. The last 12 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. 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.

David Bishop: Got it. And then, Raj, I think you noted the preamble, pretty good line of sight into the noninterest-bearing pipeline here, even if you’re flat, you’re probably still looking at a 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?

Raj Singh: Yes. We will give you exact guidance in January. But looking at just where the pipeline stands right now, I feel pretty optimistic.

David Bishop: Great. Thank you.

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

Stephen Scouten: Hi, 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 normal puts and takes?

Leslie Lunak: Sporadic repair and maintenance expenses in there.

Stephen Scouten: 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?

Leslie Lunak: 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.

Stephen Scouten: Yes. Perfect. Very helpful, Leslie. 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 non-interest-bearing, et cetera, how do you think about that long-term potential for where you could or would like to get to NIM over the next couple of years in a perfect world?

Raj Singh: We have to get 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%.

Stephen Scouten: 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 four 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? Do we need a BKU 3.0? Is that something that’s on the table? Or how do we get that last piece there?

Raj Singh: I think it’s growth of 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.

Leslie Lunak: I mean, it’s revenue, Stephen. It is spread revenue and also incremental improvements in [fees] (ph). It’s not a cost.

Stephen Scouten: Okay. Make, sense. All right. Great thanks for 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.

Christopher Marinac: Hi, 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 from lower interest rates or new tax information you have from borrowers? What’s the potential to see upgrades in some of the commercial lines that you disclosed?

Tom Cornish: I think I’d split it into 2. I mean, one, 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 Leslie or Raj mentioned earlier, we do not count — sign leases when there’s physical occupancy until the 90 days after the rent is being paid. 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 that this particular date, this is when we will start to count that rent being paid. So we have a pretty good sight line and feel good about upgrades within the overall CRE portfolio because it’s more systemic kind of the nature of what we’re looking at.

In the C&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 at a very generalized manner. 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 will help the C&I portfolio as well. It’s harder to pick that. I would be optimistic about that. But in the CRE portfolio, it’s much easier to have very direct line of sight, and I would be more optimistic about that.

Christopher Marinac: 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. I guess that’s just normal workflow?

Raj Singh: Well, I was on vacation last week. So I was catching up on my — that’s all it was.

Christopher Marinac: Perfect. Thanks for qualifying that. Thanks again.

Raj Singh : Thank you.

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

Jon Arfstrom: Raj, on vacation before earnings. He’s clearly comfortable.

Raj Singh: 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.

Jon Arfstrom: 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, March is higher just based on what you’re doing from a business point of view. 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?

Raj Singh: 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 are 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. 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 and I think if they just continue on a steady pace and not surprise the markets, I think we’ll be fine.

Jon Arfstrom: 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 will now turn the call back over to Mr. Raj Singh for closing comments.

Raj Singh: All right. Thank you. Listen, we are happy where the quarter came out. We are happy that — like I said earlier in my remarks that everything has gone according to plan this year. It is rare that happens, but it has happened. And I’m very optimistic and excited about when I see what the next two, three 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 conclude our conference for today. Thank you for your participation, and you may now disconnect.