BankUnited, Inc. Q3 FY2024 Earnings Call

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

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. 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 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.

Thank you, Jackie. Thank you for joining us for this call. Let me start by quickly going through the numbers. This is a good quarter. Net income came in at $61.5 million or $0.81 a share. Last quarter, we reported $0.72. The same quarter last year, we were at $0.63. I checked last week what the consensus estimates were, and it was $0.74. I'm always pleased when we perform slightly better than the consensus. What contributed to this? First and foremost is margin. We had anticipated margin improvements, and it indeed increased. Margin came in at 2.78%. Last quarter, we were at 2.72%. So we experienced nice growth in margin. From the third quarter of last year to this, there has been a 9% increase in our margin, so we are pleased about that. This was the quarter when a shift in monetary policy occurred, albeit late in the quarter, but we began to lower our cost of funds slightly before that. The cost of deposits this quarter decreased to 3.06% from 3.09% last quarter. The cost of interest-bearing deposits also decreased from 4.26% to 4.20%. Keep in mind, the Fed's move happened pretty late in the quarter, so for a clearer picture, we should examine our spot rate. The portfolio APY on deposits on September 30 was 2.93%. On June 30, it was 3.09%. The spot APY for interest-bearing deposits fell from 4.29% in June to 4.01%. Even this doesn’t fully reflect the actions we are taking on deposits, as some of our deposit products can only be priced monthly. Actions taken on October 1 are not yet included. In short, we are taking proactive steps to stay ahead of changes in the interest rate landscape. Our loan-to-deposit ratio has decreased to 87.6%, which is relatively low. I feel good about the loan-to-deposit ratio from a liquidity standpoint. Regarding NIDDA, as we mentioned last quarter, we've seen strong growth, although seasonal trends shift for us in the second half. Average deposits under NIDDA were down $64 million. Total deposits increased by $93 million. The period-end NIDDA was down $430 million, influenced by a mix of factors, including seasonality, particularly in our title book and corporate book. Some of this is also due to our efforts to reduce high-priced, price-sensitive deposits — an initiative we started in the second quarter, but the impact became visible in the third quarter. I'm somewhat surprised to report that there's still been some movement from DDA to money market accounts at this stage, but we did observe some of that as well. All of this contributed to the outcome. However, what's crucial is average NIDDA. Period-end numbers can be noisy. Average DDA was also down $64 million, but despite that, our margins increased by 6 basis points, which we are very pleased about. Looking ahead to the fourth quarter, we expect seasonal headwinds to persist. Our best estimate indicates that NIDDA will remain flat, but we anticipate it will start to grow again when seasonal trends become favorable in the first and second quarters. The pipeline for new business continues to be strong, and we are pleased with the business we closed this quarter and what we aim to close in the fourth quarter. Loans were down $230 million this quarter, primarily in the residential and franchise/leasing sectors, which we've been intentionally reducing for some time. Tom will provide more detail on that shortly. Regarding credit charge-offs, we remain very low, at about $6.5 million for the quarter. We also built our reserve this quarter, with our allowance for credit losses increasing from 92 to 94 basis points. NPAs rose slightly to 54 basis points, excluding the guaranteed portion of SBA loans, which stood at 39 basis points in June. Two notable loans moved into non-performing loans this quarter within the C&I sector. This is not uncommon and does occur from time to time, and we are adequately reserved for both loans, which are in different industries—one in media and the other in logistics. However, there are no overarching trends in the portfolio suggesting a recurring issue. Our capital ratio (TCE/TA) increased to 7.6%, and our tangible book value continued to grow, reaching $36.52. In earlier remarks, we mentioned hiring Ernie Diaz earlier in the year to oversee our small business, commercial, and retail divisions. We made another significant hire this quarter with Beth Hosen, who has had a remarkable career at JPMorgan for over three decades and a short stint at Wells Fargo. We are thrilled to have her join us, and I'm confident she will make a significant impact over the next few years. Regarding recent hurricanes, we had two storms pass through, one in September and one in October. The September hurricane largely spared us, causing no damage to our physical premises or loan portfolio. The other storm last week was closer to our footprint on the West Coast, but fortunately, it did not do much harm. All branches have reopened, and we are reviewing the loan portfolio to ensure there are no impacts. Thus far, we have not found any issues, but the review is ongoing. Over the weekend, I received an email from regulators asking for some detailed information. One particular question about a small charge in our P&L from the fourth quarter last year stood out, and I couldn’t remember what it was. I reached out to Leslie, and neither of us could recall. After digging through my files, I still couldn’t find an answer for that $1 million charge, so I’ll let Leslie take it from here. This situation prompted me to revisit our situation from a year ago, and reflecting on it made me feel more optimistic. I've noted some key financial indicators over the past quarters that I want to share. Leslie can correct me if needed. The indicators of success are EPS, margin, ROA, and ROE, while keeping an eye on credit as well. After our adjustments in March, we focused on improving profitability through balance sheet transformation. Looking back at the past four quarters, our EPS started at $0.62, then $0.69, $0.72, and now $0.81—not due to buybacks but from core performance. Our net interest margin went from 2.60% to 2.57%, then 2.72%, and now to 2.78%. ROA went from 0.52% to 0.59%, 0.61%, and now 0.69%. We still have room for improvement, but this upward trajectory is encouraging. ROE similarly rose from 7.3% to 7.9%, then to 8%, and now stands at 8.8%. Again, while we are not there yet, we are heading in the right direction. Importantly, these advancements have not come from cost-cutting measures or releasing reserves; our ACL increased from 0.82% to 0.90%, then to 0.92%, and now 0.94%. We are building our ACL while charge-offs remain low, almost too low for a commercial bank. Gradually, EPS, margin, ROA, and ROE are all improving. I wanted to share this reflection because it coincided with the unexpected opportunity to revisit the previous year's fourth quarter, which I had not been focused on. As always, we provide guidance every January, which is our best estimate for the year ahead. Sometimes we are spot on; other times, we aren't. For example, last year, we anticipated changes during March that completely overturned our initial guidance. This year, however, our guidance aligns well with our expectations. We projected double-digit NIDDA growth, currently at about 11.7%. We anticipated high single-digit growth in non-broker deposits, and we are just over 8% now. We expected margin growth reaching the high 2s, and here we are at 2.78%. We estimated loans would grow in the high single digits; we may fall slightly short but still hope to end in the mid-single digits. It's a welcome contrast to last year, where everything was unpredictable; this year, things are progressing according to plan. I want to emphasize that these improvements are not due to artificial methods or drastic balance sheet restructurings, but rather a sustained long-term effort to enhance our balance sheets while maintaining expense and credit controls. I am pleased with where we are headed. It's essential to take a broader view beyond just one quarter; trends over two, three, or four quarters are vital. With that, I will hand it over to Mr. Cornish.

Thank you, Raj. Just for the record, I didn't remember the $1 million charge either.

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

I'm sure we'll find it.

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. The 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. The 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 expecting an overall solid mid-single-digit growth. If you look at it in a few components, I think our 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 call the core daily C&I business were 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 the more market-sensitive areas, things like capital call lending and issues like that. It has not been so much that the demand has not been there overall from a market perspective, but we maintain a fairly disciplined view on risk ratings, rate adequacy, and things of that nature. When that business is there, we take advantage of it; when it's not there, we typically pass. In some of those business categories, we've not seen the right blend of rate, structure, credit quality, and whatnot. Our performance there has been a bit lighter than we originally planned. But in our core business area, I think it has been pretty good. Production has been pretty good all year long, particularly in the corporate banking area for the year. The second piece is the CRE pipeline; it started out originally at the beginning of the year a bit slower. It has 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 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 in all areas are looking good. We did see in Q3 a higher level of payoffs than we normally see. That comes with the game. 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 upsizing and elected to step out of for various reasons, either relationship reasons, pricing reasons, or a slightly different view of the structure of the credit. 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 are a little more headline-worthy, but a couple of levels below that at the relationship manager level and the practice leader areas, we've continued hiring in all of our groups in all of our geographies. Q3 was a good hiring quarter for us. A little 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, at 25% of total loans. Accretive risk-based capital is at 164% comparatively based upon June 30, 2024. All reports indicate that 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 median 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%. 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. The office sector continues to be the area we're watching most closely. As I say at every call, I have every office loan in front of me right now, and we're watching it very carefully. We are seeing some improvements in the sector, but overall, the demographics of office and how it will play out and return to office is still a developing story at this point. For our portfolio, we have a total office portfolio of $1.8 billion, with 57% in Florida, which is predominantly suburban, and 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. 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%. The weighted average debt service coverage ratio was at 1.56 as of September 30. So overall, we are well positioned. It's still early, and there's a lot remaining to play out in the office sector broadly in our portfolio. I would caution against overgeneralizing, but we are starting to see, particularly in Florida, some good, consistent trends with quarterly upticks in debt service coverage ratios across the board. Overall, the office portfolio continues to perform comparatively well and is characterized by strong sponsors who continue to support the underlying properties. To date, any asset concerns are very specific to a small handful of loans and are 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. 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.

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. The yield on securities was up 2 basis points quarter-over-quarter as well. 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 deposit rates down from September 1 through October 11. No magic to that date; it's just when we did the math, the beta on the non-maturity interest-bearing book was 78%. That's a 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. That's just an example of the progress we're making. In terms of guidance around the NIM, I expect the NIM for Q4 to be roughly flat to Q3. The reason for tempering that previous guidance a little bit is there are a couple of things going on. We are at a 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 it's really a timing thing. The rates are coming down or are forecasted currently to come down a little bit faster than we originally thought they would. So back to there just being a little time needed for catch-up there. Looking forward on the NIM, as we've been saying all along, the trajectory in the future will be more dependent on our ability to continue the balance sheet transformation story and to continue the remixing on both sides than it will be on what the Fed does. The static balance sheet has, for some time, remained 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. 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 take a little bit longer than one quarter view, was a very good one. With respect to the provision and reserve, the provision this quarter was $9 million. The ACL to loans ratio is up from 92 to 94 basis points. The commercial ACL ratio, including C&I, CRE, franchise, and equipment finance was 1.41% at September 30. This quarter, the provision had 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 related primarily to a reduction in specific reserve for one loan where we had an updated valuation come in much more favorably than we had expected. 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 this quarter. You saw the increase in non-interest expense, and that was mainly on the comp line. 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 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 a slight decrease in the fourth quarter for NIDDA.

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

Yes. And we 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.

Yes. I just realized, I forgot to mention the numbers I rattled off on EPS, ROA, and 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.

Thank you. Our first question comes from Benjamin Gerlinger with Citi. Your line is open.

Hi, good morning, everyone.

Hi, Ben.

Hi, Ben.

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?

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

Yes. Okay. That's fair. And I know you don't want to give '25 guidance. When you think about just kind of the quarterly or kind of seasonality cadence of the non-interest-bearing deposits, is it 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? 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 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.

I think you're accurate for our title business, but then there is a lot of business outside of the title space. Each one of those business lines has its own cadence, and 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 has the bigger swings from month to month or quarter to quarter. You are correct for that business; it starts picking up mid-first quarter and peaks in the summer because it's very driven by purchase money. Overall, I think expecting the 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 big mortgage sort of market turn that can turn in our favor because it's already at a pretty historic low. So if it does turn, that will be sort of gravy on top, but we are not sitting here counting on that.

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 —.

It is onetime per car, but it doesn't always happen in the same quarter necessarily.

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

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

Good job, Tom.

Well, I tried.

And then my other question, I know, Raj, you talked through like earnings have improved, reserves have improved, the interest-bearing — or NIB deposits have improved. Capital has also improved. 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. I'm kind of just curious your thoughts on 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?

So we're actively in discussion right now on that topic. We are in capital planning, budgeting mode as we speak. Over the course of the next two months, it is going to be a more intensive dialogue on that front. We did talk to the Board about this as recently as our last Board meeting, which was in August. At that time, they decided not to 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 due to the balance sheet changing. CET1, given that we are leaning on commercial growth and running off 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. If we're not able to, then yes, we will look at share buybacks as a way to return capital. Also, pre-pandemic or pre the crisis 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 consider that, yes, we do have excess capital, but it's not like oodles and oodles of excess capital. If we can deploy it in growth, that would be my top choice. If not, we'll look to doing a buyback next year.

Got it. That’s helpful. Thank you.

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

Hi, good morning, guys.

Good morning, Woody.

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?

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

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?

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

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?

Yes.

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

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

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

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 look 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?

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.

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 or rate decrease.

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

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 more just the DDA balances being lower than expected? Or is that rates on yields?

Now the primary driver, there are a lot of moving parts 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.

Our margin is obviously directly related to our NIDDA. If you grow that, margin will grow. 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 focus so much on NIDDA growth. 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.

Okay. And then just finally for me. I think Tom was mentioning the pay down — the level of pay down activity versus the strength of the pipeline in 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?

I would say the latter would be true. We would expect the production will outdistance payoffs. Payoffs when people sell businesses is always very difficult to predict because they typically don't tell you until a few days before because there’s a lot of sponsor activity, and sponsors don't tend to release that information. I would say if you looked at the payoff level for Q3, it was higher than it has been in past quarters. 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 expect that to be a higher level than we would see going forward. However, we expect the production in Q4 will certainly be the highest we've seen this year.

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.

Okay. Great. Thanks.

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

Hi, good morning.

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?

I mean, I think we should probably see for the full year, mid-single-digit growth in NII as well. 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 in NII.

Sorry, go ahead.

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?

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 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. I think these numbers need to get over 1% and over 10%, 11%, 12% range for ROE. That, again, will not get done in the next one or two quarters. If you see the trajectory has been over the last few months, it's going to take a better part of next year to get up there. We'll give you more guidance in January when we have penciled down our budgeting. 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's still work to be done.

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

It's a mix.

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.

Okay. Great. Thanks for the color.

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

Hi, good morning, guys.

Hi, David.

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.

I think one-third of that $430 million decline was from the title business roughly.

Okay. And about where do those deposits sit now?

I've got somebody looking that up, Dave; I'll get right back to you.

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?

I think, if I recall, I think it was 38 customers or relationships that were 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 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.

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

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?

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

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

It's fairly big. It can easily bring in a couple of hundred million bucks.

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?

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

That was also the big learning from March of 2023.

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. So each one is its own separate business, which leads to the complexity of trying to onboard this.

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

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?

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.

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?

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.

Okay. Great. Maybe just one last one, the buyback. I was just curious what's holding the Board back? I know you've been asked this question every quarter, and a lot of times, you 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?

It's not the second level. It's not any one thing. The 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. The Board meeting was literally three days after that. The move on the boardroom was like, what is going on? What does this all mean? They’re taking into account the market, they're looking at the uncertainty from the geopolitical situation we're in. They're looking at what kind of growth might be at our doorstep. They are looking at the pluses and minuses, and they're also saying, okay, if we do a buyback, how big is it going to be? How material will it be? We show them the numbers; it's not like we can go out and do a $300 million, $400 million buyback. It is going to be small. When you run through it and say, okay, so what is the bottom line EPS impact, and it is not much. 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, 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.

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

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

Hi, good morning. Question for Raj or Tom. In the slide deck, you mention significant capacity to grow in the commercial real estate sector, around 164%. I noticed a slight increase in multifamily lending this quarter. I'm curious if you have any specific guidelines or targets for that ratio, and what your comfort level is for increasing it.

I believe there is significant potential for growth. It's not about increasing the specific percentage we mentioned. We have ample opportunities for expansion, although we are avoiding certain asset classes. For instance, the office sector is currently off-limits, and we are very cautious with hospitality, taking on only a few deals. Our growth avenues are limited by our concentration choices. The constraints come from these specific areas, not the overall commercial real estate market. There's plenty of opportunity in the overall CRE market; however, there is no opportunity in the office sector and very little in hospitality. We see some potential in warehouses and are exploring new asset classes like data centers, which we have not previously focused on. Certain subsegments of commercial real estate are much more constrained than the overall market.

Yes. I would 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 as multifamily and industrial, the last 12 to 18 months saw 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 quite a deal, we are cautious when it comes to building these concentrations and ensuring that we're within the overall asset class segmentation strategy we have. And that's really the limiting factor rather than a big picture up number.

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 an 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?

Yes. We will give you exact guidance in January. Looking at just where the pipeline stands right now, I feel pretty optimistic.

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

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?

Sporadic repair and maintenance expenses in there.

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

I mean I would look at maybe four 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.

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?

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%.

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?

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. That is deliberate because we're busy transforming it. But eventually, we have to get to growing it.

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

Okay. Make sense. All right. Great thanks for the time guys. Appreciate it.

Thank you. And our last question is coming from the line of Christopher Marinac with Janney Montgomery Scott. Your line is open.

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?

I think I'd split it into two. 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. 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. We can chart that property by property and look at it of those properties that have been downgraded. We can almost say that this particular date is when we will start to count that rent being paid. We have a pretty good sight line and feel good about upgrades within the overall CRE portfolio because it's more systemic compared to 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 a different industry segment, with different issues. It's a little harder to look at it in a generalized manner. I would say we see some where we think there's good upgrade potential. Some management changes and business model changes are ongoing, which may take a longer period of time, and some may be more stuck where they are. I would say in general, lower rates will help everything and 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.

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?

Well, I was on vacation last week. So I was catching up on my — that's all it was.

Perfect. Thanks for qualifying that. Thanks again.

Thank you. Listen, we are happy with 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. I'm very optimistic and excited about what the next two or 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.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and you may now disconnect.