BankUnited, Inc. Q4 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the BankUnited Fourth Quarter and Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Greenfield, Corporate Secretary. Please, go ahead.

Thank you, Michelle. Good morning, and thank you for joining us today on our fourth quarter and fiscal year 2022 results conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflects the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including, without limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by external circumstances outside the company's direct control. The company does not undertake any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2021, and any subsequent quarterly report on Form 10-Q, or current report on Form 8-K, which are available at the SEC's website, www.sec.gov. With that, I'd like to turn the call over to Raj.

Thank you, Susan. Welcome, everyone. Thank you for joining us. So we announced earnings this morning. EPS for the quarter came in at $0.82; for the fiscal year, $3.54. Let me get quickly into the components, the key components that you will find in the release. Loans. Loan growth came in at $619 million. If you look at our meet and pay businesses, commercial and CRE, it actually grew $722 million. So very happy about what the lending teams were able to accomplish this quarter. Deposits, which are under a lot of pressure across the system, we actually grew deposits a little bit, $160 million, though non-interest-bearing deposits did decline given the rate environment and how Fed funds are impacting this. So non-interest-bearing deposits declined by $756 million. Demand deposits now stand at about 29% of our total deposits. When we started this demand deposit growth journey five or six years ago, we were at 14%. Just before the pandemic, we were at about 18% DDA. Today, we're at 29%. So I'm feeling pretty good about it. Despite the reduction in DDA that we saw this year, we're still in a decent place. Margin expanded again, though a little less than in previous quarters, as we have highlighted to you. Margin came in at 2.81%. It was up from 2.76% in the prior quarter. So for the year, I think margin grew by 30 basis points, which is right in line with what we guided you at this call last year. Provision, before I talk about provision, let me discuss a little bit about credit quality. Criticized classified assets continue to come down as they have over the last many quarters. Our non-performing loans are actually now at 42 basis points. They were 64 last quarter, and this includes a guaranteed portion of SBA loans. If you back that out, non-performing loans are now down to 26 basis points. Just before this call, I asked Leslie to check for me what the non-performing loans were before the pandemic hit. And non-performing loans today in dollars are at $105 million. Before the pandemic hit, we were at $205 million. So non-performing loans today are half of what they were. And so from a credit quality perspective in the portfolio, we have been, consciously and subconsciously, getting ready for whatever slowdown is coming, and we feel pretty good about where we are whatever comes our way. Having said that, we are more cautious about the environment than we were three months ago. So we did tweak our assumptions and increased our reserve. We took our reserve up from 54 basis points to 59 basis points. We faced growth in the portfolio. All of that added up to a provision of just under $40 million. Also, the buyback continued as we promised last time. We bought back, I think, in the fourth quarter, $65 million. We'd already bought $10 million in the previous quarter from this authorization, leading to $75 million in this authorization, which we will continue to execute as we see fit. Quickly, let me talk about the environment, and then we'll discuss guidance for next year. The environment for 2023 is expected to involve a slowdown and possibly even a mild recession. That seems to be the consensus out there. The yield curve is inverted. As everyone can see, the Fed wants to take short-term rates up closer to 5%, and the 10-year seems to want to go closer to 3%. So it's an inverted yield curve and it is expected to stay inverted all through this year, likely into next year as well. Last year, the Fed slammed on the brakes. This year, they're not slamming on the brakes. It looks like they still have some pressure on the brakes, and they will likely take the foot off the pedal this year, but it's unlikely, at least based on what the Fed is saying, that they will step on the gas pedal. The market disagrees, and only time will tell how things play out. We build all of our internal models and projections based on the future curve we’re seeing. Labor costs, while they were very high last year, I would say they are still higher than usual but are moderating somewhat, based on some weakness in certain sectors. So that is good news that labor costs are starting to normalize, but they're not back to normal yet. On the other side, it is good news that margins are better than we've seen. Lending margins and loan pricing are very rational. We're getting paid for taking credit risk, pretty much across the board from the safest to any kind of asset you want to participate in. Margins are 50, 70, 80, or even 90 basis points better than they were just nine months ago. Most importantly, the Fed is succeeding in its mission of controlling inflation, which is very important. Three or six months ago, this looked like a pretty chaotic economic environment, but the Fed is finally having success. That will also have an impact on this inverted yield curve, which isn’t good for bank margins. So, as the Fed finishes tightening and gets to the other side, it will create a better rate environment for banks. But right now, the inverted yield curve poses challenges. Last year, we provided guidance around loans, deposits, margins, and so on. We said loans would grow mid to high single digits; they grew 6% in total, 13% for commercial and real estate, our main categories. Deposits, we said mid-single digits, but starting in January of last year, nobody foresaw what the Fed was about to do; I don't think even the Fed foresaw it. So, we missed that. Margin, we said would expand, and it did, by 30 basis points, coming in exactly as we expected. Expenses, we said would grow mid to high single digits, and it did, with a 7.5% growth in expenses. The end result was that we also said we would buy back stock, and we did, a little over $400 million worth of stock. Net interest income grew by 15%, based on metrics I looked at this morning. I compare to 2019, a clean year without the disturbances of the pandemic. Even amid the difficult rate environment, our margin is significantly better than it was in 2019, reflecting the hard work put into improving our franchise. Cost of funds, though elevated at 142 basis points, is occurring in an environment of rates exceeding 4%. Fed funds rates could reach 5%. So, a lot of progress has been made on the balance sheet, whether analyzing credit or profitability metrics. Yes, there is a lazy part of the balance sheet, considering our large securities and residential portfolios, but overall, I believe the balance sheet is in a better place than it was before the pandemic. Given all I've shared about the environment, I think we're looking at loans growing at mid-single digits, deposits doing the same, and margins still expanding, although not as much as they did last year. Expense growth will again be quite similar to last year. The buyback will continue, and we will complete the $75 million over the next few weeks. In all likelihood, the Board will authorize another $150 million after that. A quick note: it's been nine months since we launched our Atlanta presence, and I'm extremely happy with how that has panned out. We opened a branch in Dallas; however, we didn't fully acquire a team on the commercial banking side, but we are in the market for that now. So Dallas will be a focus this year, not just a branch but establishing full capability. Atlanta is off and running well. Looking forward, we will seek opportunities like Dallas and Atlanta, continuing to grow this strategy. I don’t want to take away all the talking points here, so I'll leave some for Tom. Tom, I'll pass it over to you, and then you can pass it to Leslie.

Great. Thanks, Raj. As Raj mentioned, total loans grew by $619 million for the quarter, with commercial and industrial loans growing by $599 million and commercial real estate growing by $123 million. Overall, as we continue to build momentum, the $722 million growth in those two lines of business was extremely encouraging for us. We felt great about it. I think if we break it down a little bit and look at industry components and asset classes, it was really broad. You can see in the supplemental data that we generally provide that, in the C&I side, we grew in 11 different segments during the quarter, leading to $600 million of loan growth for this quarter. This is indicative of a strong, consistent growth trend in C&I throughout the year. Our middle market and corporate banking businesses grew by 25% for the year, which was an outstanding achievement reflective of our efforts and favorable market conditions. Florida has performed exceptionally well; all of the major cities in Florida have thrived. We are fortunate to be operating in great markets. As Raj mentioned, we're delighted with our accomplishments in Atlanta in a very short time, receiving multi-hundred-million dollar commitments in that market with excellent relationships. We are also enthusiastic about expanding into Dallas, which we perceive as a parallel market to Atlanta, given the size of the MSA and the depth of its economy across various industry segments that align with our risk profile for diversification. The rest of Florida continues to excel; we saw good growth in the commercial segments in the New York market both in the quarter and for the year. Our last quarter yielded some growth in CRE; we predicted we would see more, and we did. Additionally, we observed healthy developments in the industrial and warehouse segments, particularly in the Southeast. We committed more resources to our construction lending efforts and noticed a slight uptick in our construction loan portfolio, with a strong focus on multifamily construction. There is a telltale shortage of multifamily units across most of the areas we serve, fueling our optimism about future growth. However, the mortgage warehouse environment remains pretty challenged, and while we’re committed to that business, we expect some growth in it. Currently, utilization rates are fairly low, and our Pinnacle and Bridge segments have continued to decline this year. If the tax rates and pricing in Pinnacle improve, that may present a growth opportunity. We continue to deemphasize franchise lending and equipment finance, driven by a perspective on overall quality and current return on assets. Residential loans grew modestly in Q4. Moving forward into this year, we see ongoing growth in core C&I and CRE books across all geographies. We are committed to our mortgage warehouse venture for the long-term, hoping to see some growth in that portfolio as well. If conditions improve for Ginnie Mae and EBO business, further growth opportunities may also arise. We also continue to build sales teams and bring on new producers in the market, looking at key hires even in this quarter, beyond the Dallas expansion we’ve discussed. On the deposit side, total deposits grew by $160 million for the quarter, primarily in interest-bearing deposits. As Raj pointed out, non-interest-bearing deposits declined this quarter, which was expected given the rising rates and tightening liquidity. The loan-to-deposit ratio finished at 90%, consistent with the previous quarter. So, with that, Leslie will provide more details on the quarter.

Thanks, Tom. As we guided last quarter and as Raj stated, we saw the net interest margin increase this quarter to 2.81% from 2.76%. The yield on investment securities increased to 4.33% from 3.12%. The duration of this portfolio stands at 1.94% as of December 31. The yield on loans grew to 4.72% from 4.11% this quarter, predominantly due to the resetting of coupon rates on variable rate instruments and new production and securities purchases at higher rates. The total cost of deposits was 142 basis points for the quarter, up from 78 basis points last quarter. I'd refer you to slide 6 of the deck. While this narrative is still playing out, you can see on that slide the significant spread between the Fed funds target and the cost of deposits compared to 2019, representing the improvement we have made in our deposit base quality. Our total deposit beta to date for this cycle is about 43%, versus 61% at the peak of the last cycle. We anticipate it may rise from 43%, but we still don't expect it to reach that previous peak. As for our reserves and the provision, slides 9 and 10 provide details on this. The provision this quarter was $39.6 million, and the allowance for credit losses increased to 59 basis points from 54 basis points. As Raj mentioned, despite our decline in non-performing loans and favorable credit quality signs, we increased reserves primarily due to heightened uncertainty about the economy. We weighted a downside scenario more heavily while establishing our reserve this quarter, with many specific reserves being significantly adjusted for a single loan charged off before the end of the quarter. Almost all the charge-offs taken this quarter were related to that particular loan. There's not much to address regarding non-interest income and expense, aside from reiterating that for the year, non-interest expenses, excluding the hedge loss that we experienced in the fourth quarter of 2021, rose 7.5%. This aligns precisely with what we had projected since the beginning of the year. I don't think there's much to comment on for this quarter. With that, I'll turn it back to Raj for closing comments, and then we will take your questions.

I will open it up for questions. I know there are 19 other banks that have released their earnings. So let’s take questions. Operator, you can open up the line.

Our first question comes from Ben Gerlinger with Hovde Group. Your line is now open.

Good morning, everyone. Appreciate you taking the time.

Good morning.

I was curious; I just want to follow up on the guidance that was given. You said kind of the mid-single-digit loan growth and deposit growth. Was that correct?

Yes.

And then, thinking about the deposit perspective, with quantitative tightening and the need to compete against the treasury curve, what else is available to depositors? I mean, when you look at year-over-year, your deposits are down. I was curious if there are any new actions, or are you willing to price the market to garner some overall growth relative to peers? I mean, you guys aren't the only ones. I don't mean to pick on you, but deposits are down. What actions or strategy might be employed to increase them?

I believe the key difference between this year and last year is that we're anticipating a more gradual tightening of monetary policy from the Fed, rather than a sudden halt. If the Fed continues with aggressive measures, it will be challenging to achieve single-digit growth. Out of all the guidance I've shared regarding loans, margin, and deposits, the deposit guidance is the most difficult. We aim to keep our loan-to-deposit ratio below 105, so securing deposits largely depends on pricing. While loans allow us to estimate future demand based on the pipeline, it's much harder to project deposits. If we see an increase of 325 basis points followed by a slowdown in rate hikes, there's a strong chance we could reach mid-single-digit growth. However, if the tightening is more intense, reaching mid-single digits will be tough.

Ben, I would also add that when we look at the creation of new relationships across the franchise and examine virtually all of the business segments we are in, the overarching economic activity certainly impacts the balances in any individual account. However, we have good trend line information and performance history this year concerning the number of new relationships created by our various sales teams. That gives us confidence that this trend will continue as we look into the year.

Got you. So you guys could potentially get the deposits, considering the cost. Conversely, are you expecting some margin expansion from here?

Yes.

I guess the nuance probably relates to the level. Are you expecting the expenses to follow the pattern of previous years? Typically, BKU has demonstrated noticeable seasonality in expenses, so do you still expect Q1 to be a bit higher relative to Q3, and then the fourth quarter would be the highest in the year, or is that no longer applicable? I’m seeking overall quarter-over-quarter expectations. The whole year is around seven ballpark, but just looking at the quarters.

Sure. We don't spend much time focusing on any one specific quarter. However, compensation expenses tend to be higher in the first quarter due to the impact of certain payroll taxes and benefits, among other factors. As we’ve been investing in people and adding new sales teams and support staff to facilitate business growth, that trend may not persist consistently throughout the year as new hires come on board. Hence, we won’t concentrate on quarter-to-quarter forecasts, but more on the year as a whole. You will note a spike in benefits, but the trend may smooth out with new hires coming onboard more evenly throughout the year.

Got it. That's helpful. Appreciate the time, everyone. You guys have done a great job remapping the deposit side of the balance sheet. This clearly positions you much better than a few years ago. Thank you.

Thanks.

Please standby for our next question. Our next question comes from Will Jones with KBW. Your line is now open.

Great. Thanks. Good morning guys.

Good morning.

Good morning.

Yes, I wanted to follow up on expenses first. Raj, just to clarify, you said expense guidance is the same as last year, which would be mid to high single digits, correct?

Yes.

Okay. Just thinking about the base, is the right way to go about this to annualize the fourth quarter and grow from there, or is it really just cumulative? What do you think?

Yes, take the full year. Take the full year and apply that to the full year.

Okay. That’s helpful. Thank you. And Raj, I know you mentioned one or two non-recurring or one-time charges that happened in the third quarter. Was there anything similar that happened in the fourth quarter? I know there’s still a fairly big pickup in expenses.

Not really.

I don’t think there’s anything particularly unique in the fourth quarter.

Yes, right.

Great. Thank you. Moving to the allowance, I appreciate your detailed commentary on charge-offs. I hope to understand more about that.

So, that loan didn’t work out. I have to be careful with what I say. What I will tell you is, in a situation where we lose faith in the financials of the company, we intend to charge off the loan. We basically write off based on the target. This is a developing situation. It's only three months since discovery, and we just took a very conservative stance, choosing to write off the loan given uncertainty around recovery. There are recoveries that we've seen, and I'm hopeful for some recoveries, but we won't know that with confidence.

Great. And if I could dig a bit deeper, is there any specific industry or other details around that?

It's a one-off situation. When the audited financials come into question, it’s not about the industry; it’s about that one situation.

Got it. Understood. Thank you. Thinking holistically, you have mid to high single-digit expense growth year-over-year, and I appreciate your guidance. Do you feel like you could see revenue growth over the mid to high single-digit expenses and maintain positive operating leverage as you move into 2023?

Yes. Yes. Over time, I absolutely agree that that’s what we're shooting for, and that's what we will get to. It may not be every quarter. It is a tough environment to achieve that. But remember, our investments are not just for the next six or twelve months. Some of these investments are multi-year initiatives with multi-year payoffs. We had a lot of discussion during the budgeting season while addressing the potential for a slowdown or recession. Should we pull back on investments? However, you cannot take a very short-term view on investing; you must maintain a longer-term perspective. We are not going to pull back on these initiatives because the next couple of quarters may present a difficult banking environment or a potential recession in the second half of the year. We launched a plan last year. We are launching something in Dallas this year and possibly new markets next. These investments include technological advancements, so you can’t base your investing sentiment on quarterly or annual fluctuation. We have one of the better expense-to-asset ratios among banks in the country. I sometimes argue that we’re not investing enough, which is why our ratios are as low as they are. Steady-paced investing is crucial. Revenue is somewhat tied to the environment we're in; it's a tough year, but next year may not be. Over time, our expectation is for revenue to outpace expenses. Otherwise, why even pursue these investments?

Currently, our forecast depicts a modest amount of margin expansion next year, as Raj mentioned. With that said, the most challenging aspect of predicting that is the deposit environment.

Understood, great. That’s all my questions. Thank you.

Please standby for our next question. Our next question comes from Timur Braziler with Wells Fargo. Your line is now open.

Hi, good morning.

Good morning.

Good morning.

Maybe circling back to that comment from you, Leslie, on margin expansion next year. What is the rate outlook that you’re using for that guidance? And is the deposit rate environment you're currently seeing a headwind in Q1?

Yes. Yes, we’re not focused on quarter-by-quarter changes as it's very difficult to predict. However, we are using the forward curve, which suggests that Fed funds will peak at 5% in the second quarter and taper to 4.5% to 4.75% by the end of the year, all while maintaining an inverted treasury curve throughout the year. This forward curve underlies our estimates. However, the wildcard is the deposit environment. As Raj expressed, we're confident we can grow core deposits this year due to our geographic expansion, the growth of the Florida economy, and the addition of producers. However, the Fed has been applying tighter controls, which complicates margin predictions.

Okay. Could you provide your expectations for the deposit environment in your geography as the Fed pauses or slows rate hikes? Is competition going to mean deposit pricing continues to rise as loan demand remains strong, or will it taper off like during the last cycle?

You're asking about not just the next six or twelve months but beyond that, and it's very hard for me to predict. But there is a lag in both directions. On the way up, there's some lag, and on the way down, there will be as well. It's really challenging for me to assert what will occur once the Fed begins pulling back. I don't know the environment for loan demand or if we will be in a recession. It’s also important to note that much of our deposit business is linked to the real estate sector, which has faced various challenges. We may witness a mini refi boom; if the tenure floats closer to 3.35%, that could help our warehouse and deposit business. However, we’re not counting on that; we’re very cognizant of the potential risks. A substantial portion of the pain we've encountered this year stemmed from title insurance, and this sector is deep in recession currently. However, the situation could improve with minimal shifts in long-term rates, leading to increased activity. We're optimistic but cautious.

I believe the more rate-sensitive parts of the deposit portfolio will respond rapidly, whether on the way up or down. Still, the core aspects of the deposit portfolio may experience a lag, making it difficult to state definitively how that will unfold.

It’s even more complex for us because, in many ways, our deposit business is linked to the real estate sector; therefore, we could have surges that others may not expect. It’s significant to always protect future potential margins by not investing for just the short term.

Understood. I appreciate that. Lastly, your C&I growth was quite impressive throughout the year and in Q4 particularly. I'm interested in understanding how much of that growth can be attributed to increased utilization versus new client growth. And are we able to form deposit relationships with these new C&I clients you’re taking on board? How much of that production can self-fund?

I would say that we didn’t see much of a lift from utilization throughout the year. When we analyze production in the C&I teams, it was largely driven by strong new client and relationship production. We indeed secured significant deposits from these; our main focus is on relationships inherent to our banking practice, which tend to lend strength to robust depository and treasury management-type relationships. There hasn't been much improvement in utilization rates, remaining flat throughout the year. If that does increase, it could be beneficial for us, but we’ve primarily focused on new relationship production this year across all C&I segments.

Got it. Thank you for your insights. I appreciate it.

Please standby for our next question. Our next question comes from Steven Alexopoulos with JPMorgan. Your line is now open.

Hi. Good morning. This is Alex Lau on for Steve.

Good morning, Alex.

Good morning.

My first question is regarding deposits. Could you elaborate on the decrease in non-interest-bearing deposits? Where are your clients reallocating their funds? Are they moving balance internally or seeking better opportunities at other regional banks or T-bills?

Just to clarify, you mean year-to-date, not just this quarter, correct? We haven’t experienced a decline in non-interest-bearing deposits this quarter.

We have experienced a decline across several areas. One aspect involves a slowdown in the real estate industry overall, as we are witnessing average balances across title business decline significantly. Additionally, we noticed that clients utilize their funds for buybacks or dividends, which has proven to be a substantial category. Furthermore, as earnings credit rates have increased, the necessary balances to avoid fees from the bank have decreased, leading to capital being freed up to invest in money markets or treasuries. As we don't operate a wealth management business, we're not directly witnessing the movement of funds into T-bills from our clients, although some small retail accounts may engage in that. It's essentially a mesh of factors. The decline in the real estate industry is likely the most significant contributor.

Thanks, Raj.

Yes. Just a point of clarification, Alex. In 2021, there was a significant buildup of corporate deposit balances across nearly all industry sectors following the pandemic, which has been dwindling.

Thanks. Just as a follow-up regarding that buildup: do you have any estimate as to how much of your demand deposits qualify as excess before reaching a core operating level?

We spend considerable time attempting to analyze that, but we still don't know the answer.

Fair enough. Regarding the net interest margin guidance for expansion in 2023, can you provide insights into the trajectory? Will there be consistent expansion each quarter, or do you anticipate a potential reversal at some point while still ending the year on a higher note?

It's tough to predict due to numerous external factors affecting our quarterly performance. Thus, it's unnecessary to specify NIM on a quarterly basis, even though I consider the year as a whole somewhat guideable.

Got it. One last question regarding the other fee income line of $7 million. It was somewhat elevated this quarter compared to the rest of the year. Could you illuminate what drove this and if there's anything one-off in nature?

That category comprises numerous smaller components, Alex. It's hard to determine one specific cause. One item that has shown volatility over the last year or so has been BOLI revenue, for which forecasting is challenging. Hence, there isn't one remarkable factor to highlight; it's a collection of smaller incipient earnings. In terms of the core items constituting non-interest income, we expect steady growth, but many factors can be volatile.

Okay. Thanks for your insights.

Please standby for our next question. Our next question comes from Stephen Scouten with Piper Sandler. Your line is now open.

Thank you. Good morning everyone. I appreciate your time. The NIM guidance for next year is quite optimistic compared to what we are observing in the industry regarding potential expansion. Could you clarify if this guidance is based on the 2.81% fourth-quarter level or the 2.68% full-year level?

When I provided this guidance, I referenced the full-year level, but I also anticipate expansion relative to the 2.81%. That said, it is worth noting that multiple challenges could pressure this forecast, particularly regarding the deposit environment.

We’re not expecting as much pressure as we experienced this year.

Understood. That's encouraging. It likely correlates with what you mentioned about various growth metrics you’re undertaking – a reflection of your efforts and the risk you’re taking. Could you provide insights on what you’re observing regarding new loan yields?

The new commercial loans for this quarter averaged in the mid-sixes overall, accounting for C&I, CRE, and all commercial sectors combined.

Great. Now, digging back into expenses, I've noticed they rose about 12% year-over-year, approximately 7.6% quarter-over-quarter. I want to ensure clarity herein. If I analyze total expenses for this year in comparison to last year – backing out the hedge termination loss from 2021, my breakdown indicates closer to 12%. Can you help reconcile that disparity, or are we in agreement in your perspective?

Yes, when I look at total expenses for this year versus last, after excluding one-off hedge expenses we absorbed last year, I’m getting an increase of around 7.5% year-over-year.

I’m noticing the same thing and tracking increase in expenses of around $10 million each of the past two quarters, which sits in line with revenue growth. Do you envision in 2023 that revenue climbs beyond the pace of expense growth?

That’s certainly our goal. However, it may not transpire every quarter, and indeed, 2023 presents challenges to that goal. Yet we wholeheartedly believe in our strategy long-term. Our investments are not solely directed at immediate outcomes but intended for sustained growth and returns across multiple years.

Our forecast does indicate that revenue growth will surpass expense growth next year, but the environment surrounding revenue is especially challenging currently, with numerous factors at play beyond our control.

Definitely. The final point I'd like to make is the key question I receive from investors regarding margin for error at BankUnited. With ROA currently realized around 80 basis points and reduced loan loss reserves assessing at 59 basis points, is there a way to gauge margin for error given low profitability levels? Could you comment on that?

I think our margins and reserve levels are intertwined with the quality of our portfolio. Compared to a traditional bank, we maintain higher levels of residential lending, which generally enjoys government guarantees, in addition to investment-grade municipal initiatives. Our non-performing loans remain at historically low levels at 26 basis points, down from 64 basis points in previous quarters. When evaluating our non-performing loans historically, we have achieved a significant decrease since the pandemic began, with both deposits and margins seeing notable improvements.

Yes, context matters. A key aspect of assessing the bank is understanding our portfolio's composition that justifies robust metrics in terms of performance and reserves.

Great, that is all my questions. Thank you very much.

Our next question comes from Jon Arfstrom with RBC Capital. Your line is now open.

Thanks. Good morning everyone.

Good morning.

Good morning Jon.

Raj, regarding the provisions, are you more pessimistic now, or is this increase simply reflecting your cautious nature? What's your expectation for provisions going forward?

I’d say we are more cautious.

Fair enough. Is it accurate to expect provisioning in 2023 primarily driven by growth and charge-offs?

Yes. The provision this quarter was primarily shaped by the outlook from Moody's S2 downside scenario. I believe we are well-positioned from a reserve perspective for a mild recession. Of course, if the economy entirely collapses, then everything changes. However, I'm not anticipating such a severe downturn, so I believe we are adequately equipped. I expect provisioning going forward to be driven mostly by production.

Understood. Are you seeing any changes in the quality of your pipelines?

We have noticed some reduction in robust activity in our pipeline. While this primarily involves positive factors as we’ve had a strong quarter with many closures, it could also stem from the fact that our clients are contemplating their next moves and might prefer to adopt a more cautious approach. We sense the intended impact of the Fed’s measures – a more cautious approach to expansion among our clients.

Absolutely. We're particularly witnessing this sentiment in the real estate sector, where decisions on investments are currently influenced significantly by the availability of capital, and thus we see investment strategies being paused.

Absolutely. Do you believe that a pause from the Fed would shift that outlook?

No, I believe the outlook we’ve provided is already reflective of such considerations.

Okay. Regarding your commercial real estate portfolio, I noticed the change in charge-offs last quarter. However, I believe you’re not showing any non-performing loans within your CRE segment. What can you tell us about the quality of this segment?

Correct.

Could you elaborate on what you're observing there? Given investor anxiety surrounding this category, is there anything you are concerned about, or do you believe this positive performance will continue?

I think this is a nuanced conversation, as it relates to various sub-portfolios. The industry must be cautious particularly in central business district office real estate, which may not present significant challenges in the immediate future, but over the next two to three years could become a key area to monitor. In contrast, Florida's strong real estate market has absorbed a substantial volume with increasing demand, thus, there aren't any substantial issues in the short term. However, for markets further from Florida, like New York, it is essential to stay vigilant.

Exactly. We have a robust asset-allocation approach when assessing our real estate portfolio. Our disciplined methodology considers sectors, geographies, and asset classes, further contributing to the overall strength of our portfolio and giving us confidence in how we manage our exposures.

Thank you for the insights. I appreciate it.

Please standby for our next question. Our next question comes from Will Jones with KBW. Your line is now open.

Hey, great. Thanks for allowing me to come back in. I wanted to follow up on the buyback. By our estimates, you executed significant buybacks this past year, roughly 12% of the company's outstanding shares in 2022. If the stock remains around current levels, are you planning to maintain this pace of buyback? Additionally, regarding your capital, I understand you don’t focus on total equity; rather, you prioritize Tier 1 capital. Do you have any internal thresholds you aim not to drop below?

Yes, indeed, we are active. The current price of the stock makes for a compelling buyback opportunity from my vantage point. Regarding the ratios we monitor, I'll have Leslie expand on that.

Absolutely. We're primarily focused on the Common Equity Tier 1 ratio. When considering capital levels, we remain deeply committed to preserving the company’s investment-grade rating, as this is paramount for us. Additionally, we want to ensure ample capital is available to support anticipated growth. These two considerations guide our constraints regarding capital usage. Our Board is set to convene in the upcoming month to finalize the capital plan for 2023, but until that happens, I can't definitively say if there will be alterations made. Thus far, though, I don't expect any significant deviations from our historical capital targets.

Understood. Thank you.

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