BankUnited Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 10 speakers on the call.

Operator

Good day. Thank you for standing by. Welcome to the BankUnited Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

You will then hear an automated message advising you that your hand is raised. Please be advised 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.

Speaker 1

Thank you, Michelle. Good morning and thank you for joining us today on our Q3 2023 results conference call. On the call this morning are Raj Singh, our Chairman, President and CEO Leslie Luniak, 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.

Speaker 1

The inclusion of this forward looking information should not be regarded as a representation Such forward looking statements are subject to various risks and uncertainties and assumptions, including without limitations, 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, such as adverse events impacting the financial services industry. The company does not undertake any obligation to 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 ks For the year ended December 31, 2022, and any subsequent quarterly report on Form 10 Q or current report on Form 8 ks, which are available at the SEC's website, www.sec.gov.

Speaker 1

With that, I'd like to turn the call over to Russ.

Speaker 2

Thank you, Susan. Welcome, everyone. Thank you for joining us for our earnings call. In preparation for this call, I usually ask Leslie like a week before if she can kind of guide me as to What are the things investors are looking for? What are the hot topics?

Speaker 2

So this time, I did the same thing. And What Leslie forwarded me was an e mail from 1 of the sell side analysts, I think it might have been JPMorgan, We're basically saying not specifically to us, but generally bank investors are looking for like 5 or 6 things that are top of mind. So in my comments, I'm going to go straight to those few things and try and answer them. The things were in that order, NIM inflation, Deposit stability, both pricing inflows, credit trends, unrealized losses, expense management And the last bullet point was sort of regulatory and in brackets, it said this really applies to larger banks. So I'm going to try and get straight to that Rather than, you know, research to take what's in our earnings, it's been out for a couple of hours.

Speaker 2

You probably have read where the numbers came out. But Those are the big topics. Let's just talk about them directly. NIM, our NIM increased by 9 basis points from 2.47 to 2 56. Just for context, if you go back last quarter, we told you that while our NIM had gone down from Q1 to Q2, 2nd quarter was pretty flat.

Speaker 2

Every month was $2.47 This quarter, we went up. So if you go back from January and look to now, Jan to Feb, Feb to March, March to April, NIM was And then for the next 3 months, it was flat. And now for the 3 months after that, it's gone up. So it's created a nice curve that I like, and I think We can safely predict that this modest improvement will keep happening in the next few months. Deposit stability is the next question.

Speaker 2

Again, this quarter, we grew Outside of brokered, we grew about $500,000,000 in deposits and even grew non interest DDA by a little more than $50,000,000 Our NIDDA to total deposits is stable at about 28%. I've been asked this question many, many times over the course of last 2 or 3 years, like what do you think the long term run rate sort of that ratio is? Where will you stabilize In terms of DVA percentage. And I've never been able to answer that question because to be very honest, I don't know When all is said and done, where things will stabilize. But now looking at this data, not just for this quarter, but For the last several months, I'm beginning to get confidence in saying that I think we're there or close to being there.

Speaker 2

And if we get another quarter or 2 of this, which I think we will be able to declare that this seems to So the bottoming out on that ratio as well. And there we say that we Shoot to actually improve from there and try and get above 30% again over the course of the next few quarters. Credit trends, quickly, net charge offs again very low at 7 basis points, I think, last quarter. They were maybe 8 basis points, if I remember right. NPAs are at 40 basis If you carve out the SBA guarantee portion, that's about 11 basis points off that 40 basis points.

Speaker 2

So still pretty low. They were slightly lower than last quarter, but they're about kind of bouncing around in that region. Unrealized losses came in at 407 that's our AOCI is about 407, I think. And last quarter, it was a little bit better at 3.73%, I think. Now obviously, that's Yes, it's a function of what's happened to rates, especially in the last few weeks.

Speaker 2

Expenses, I think we guided to you that For the second half of the year, we're going to try and keep expenses flat, and I think we pretty much delivered on that. Let me add a few other things, Sharnath. On the regulatory front, like I said, That e mail said it's really a question for larger banks, but I don't really have anything special to report on the regulatory front that you already haven't read in the American Banker. The rest of the balance sheet quickly just to go over that. Securities were down 257,000,000 Loans, like we said to you, we're taking resi down because we've gotten over weighted in resi that was down to 25.

Speaker 2

C and I was up 100, CRE was up 46. Overall, deposits loans came in down to 74. I will make a point that even within CRE, while we have C and I growth of $100,000,000 we actually did push out about $300,000,000 roughly Of non core C and I, so if we had not done that, it would have been much higher. We feel like we're getting done with what we need to push out in terms of transactional business, so Feeling pretty good looking forward. FHLB, we paid off a little over $800,000,000 Broker CDs, we paid off a little over $200,000,000 Actually FHLB balances now stand lower than they were at the end of last year.

Speaker 2

So from a balance sheet perspective, we feel pretty good. Loan to deposit ratio has Gone down to 93% from 95% last quarter. And despite taking the balance sheet down as much as we have, Our PPNR was slightly up. So I'm feeling pretty good about the way the quarter turned out. We did build reserves this quarter.

Speaker 2

ACL was up quite meaningfully to 80 basis points and that's because we don't know when a slowdown is coming, if In a quarter or 2 or 3, but it does feel like something will happen. The Fed has done a lot to slow the economy down and Hopefully, it's just a soft landing, but it may be a mild recession and we have to be ready for it. So we did build reserves up. Most of that reserve build was really Because of the Moody's outlook got worse and when you run it through our numbers That contributed to more than half of our provision. A quick comment on the environment.

Speaker 2

I always make a statement or 2 on this. I think on the rate side, rate economy and regulatory, I'll talk about all 3. On the rate side, my personal opinion is, I think the Fed is done. Whatever little more they wanted to do, I think the market is doing for them. And I would be surprised if there is Much movement from the Fed.

Speaker 2

Maybe another move in a couple of meetings, but it feels like that story has inflected. The economy is still coming along fine, but reading more and more about how the consumer is Pretty much done depleting the buildup of cash from the pandemic. So we're being very careful and vigilant On the economy to see any signs of cracking, I think eventually we will see some. And on the regulatory front, a lot That is about to happen that we're all reading about. It impacts obviously banks in the $100,000,000,000,000 to $1,000,000,000,000 range A lot more.

Speaker 2

There will be some trickle down effect for us. So but on the day to day basis, I think Everything is fine in the regulatory front. I don't think anybody is being unreasonable. And yes, there will be A little more burden on the regulatory front that we'll all have to deal with, but I think it's sometimes a little overplayed. So with that, I'm missing anything?

Speaker 2

No, I just wrote these things down on a piece of paper. So I'll jump in if I'd interrupt Bob and Leslie as they are talking through their stuff. But once again, thank you for joining us. I'll turn this over to Toph. Great.

Speaker 2

Thank you, Raj. A little bit more follow-up on

Speaker 3

the Discussion on deposits and I'll link it a bit with our dialogue. Last quarter, we talked about having a good level of confidence and a strong deposit pipeline. We saw that come to fruition in this quarter with the operating lines of business Delivering, as Rod said, almost $500,000,000 of deposit growth. That was really across all of our operating businesses. So It was great to see that.

Speaker 3

$484,000,000 was the exact number. As we look at this quarter and think about what our deposit Pipeline looks like it continues to be significant and kind of in line with what we saw last quarter in executing The strategy of core operating accounts, NIDDA business, treasury management business and so forth. Our pipeline overall has not diminished from what it was last quarter despite bringing on $484,000,000 of new deposits During Q3, so we feel good about that. There's some information in the deck on Slide 8. Our largest deposit vertical Continues to be the Title Solutions business with deposits of about $2,800,000,000 as of September 30, and there's no other real significant concentration within the deposit book.

Speaker 3

Talk a little bit more about the loan side. Consistent with the strategy we've outlined for you, resi declined by 225,000,000 CRE was up about $46,000,000 for the quarter. The overall outlook for CRE is a little bit more challenging In the market today, we're not seeing as strong of pipeline opportunities in today's interest rate level and cap rate level. Less deals are making sense. So we did get $46,000,000 in growth and that asset category Loan category has been relatively flat all year if you look at where we started off the year and market conditions remain Challenging, we're happy with our overall portfolio that we have.

Speaker 3

The new generation right now It's not easy. As Rod said, C and I was up $101,000,000 for the quarter. That number really was a lot better absent the push out of non strategic relationships that Raj talked about. We had An opportunity to exit in commitments about $650,000,000 of commitments For the quarter, which was just slightly less than $300,000,000 in UPB, all of these were Relationships that were not quarter or go forward strategy and generally, they did not either meet The pricing opportunities that we see in the existing market today or any deposit strategy that we're moving forward with. So We took the opportunity to exit those in the quarter.

Speaker 3

If we look at kind of core core, I guess would be the best way I would say it. We had actually a terrific quarter in small business lending. We had a terrific quarter in the commercial segment. All of those Credits that we talked about are in the corporate banking segment and even that grew after walking away from $650,000,000 Of commitment. So I think as Rod said, we're while there will be other things like that, that will come up and redial of deals that will come up, That's probably the largest amount we're going to see in a quarter.

Speaker 3

So we're pipelines in that segment remain very strong Across all of our geographic markets and across all of our industry segments, so we feel pretty good about the C and I business as a whole across all segments. The Franchise Equipment Municipal Finance business continued to trend down modestly and mortgage warehouse lending was down $116,000,000 In response to what's happening in the residential mortgage market as a whole. Average rate on new production for the quarter It was between 8.5 percent for C and I segment. We're seeing generally deal opportunities Kind of in the SOFR plus 3.30 kind of range. So that's part of what's happening in this trade off of opportunities where We have the ability to exit credits that are significantly less than that in yield and reinvest it And more relationship oriented transactions where we're currently seeing better yields.

Speaker 3

For the CRE pipeline, what we're seeing is yields kind of Slightly under the 8% level. Spent

Speaker 2

a little bit of time, a

Speaker 3

little bit more on the CRE Portfolio, you've got significant detail on slides 12 through 14 in the supplemental deck, but a few overall comments. Our CRE portfolio continues to be modest to the overall bank's balance sheet at 23.5% Of loans, our accretive risk based total risk based capital is 168%, which is well below the regulatory guidance threshold. To date, any potential concerns that we have in any loans are not really broad across any Asset category, they're very specific to a particular loan or a particular submarket. As of September 30, The weighted average LTV of the CRE portfolio was 56%. The weighted average debt service coverage ratio was 1.8 And about 15% of the CRE portfolio matures in the next 12 months, about 8% both matures in the next 12 months and is Fixed rate.

Speaker 3

So our maturity schedule over the next 12 months is relatively light. Specifically to the office And we feel good about office overall, the portfolio that we have in particular. It's $1,800,000,000 Of that $1,800,000,000 about $200,000,000 is in traditional medical office Facility, so that's kind of different than the standard office portfolio that everyone looks at, but the total is about 1.8 with 200,000,000 in medical office. The weighted average LTV of the office portfolio was 64%. Weighted average debt service coverage ratio was 1.7 as of September 30th, and you have Detail in there, giving you a breakdown geography wise, asset class wise.

Speaker 3

But as of ninethirty, 95% was pass rated. 58% of the office portfolio is in Florida. Virtually all of that is suburban office. The Florida market in all major metropolitan areas continues to perform very well. So we feel pretty good about where we are from a Florida perspective.

Speaker 3

There are some other slides on 14 that give you some breakdown between Florida and the New York market. With respect to the New York State Portfolio, 44% of that portfolio is in Manhattan. It's a little under $200,000,000 of office exposure in Manhattan. Our properties currently are 95% leased And we only have a 5% rollover in the next 12 months. Overall, the office portfolio has an 11% rollover in the next 12 months.

Speaker 3

When we look at sort of credit quality within the overall pre portfolio, if you look at Twelvethirty onetwenty 2, we had $91,000,000 They were rated below pass. This quarter, we had $90,000,000 So the credit trends have been very stable In this portfolio, we're watching it closely, but we feel very good about the overall free portfolio and good about our office Portfolio given the properties, geographic locations and mix between suburban and office. So with that, I'll turn it over to Leslie.

Speaker 4

Great. Thanks, Tom. Just to reiterate, net income for the quarter was $47,000,000 or $0.63 per share and Earnings this quarter were impacted by the reserve build that we took this quarter. Great news about the net interest margin up to 2.56 From $2.47 last quarter, we're starting to see all of the balance sheet strategy that we've laid out for you in the past, getting some traction and having a positive impact Total earning asset yields increased from $5.30 to $5.52 with securities going up from $5.19 to 5.48, While the yield on loans went up from 5.53 to 5.54. Cost of deposits was up 28 basis points.

Speaker 4

This compares to a 41 basis point Increased last quarter, so we're continuing to see that trend of slowing in the rate of increase of our overall cost of deposits. And now sits at 2.74. We also saw the decline in relatively higher priced wholesale Funding having a positive impact on the NIM this quarter. The provision, I'm sure you're all going to ask questions about the provision, so I'll try to answer them before you ask them. The provision was $33,000,000 this quarter and the ACL to loans ratio increased from 68 basis points to 80 basis points even though Net charge offs remained very, very low.

Speaker 4

The biggest driver of the provision this quarter and the increase in the ACL was the impact of the Moody's forecast in the model and a slightly less favorable economic outlook in those forecasts, the things that were really drivers of that, The biggest one was really the rate forecast, which has a little bit higher for longer rate forecast than we saw last quarter. And there were a couple of other factors as well, but that was The most significant one. Changes in portfolio composition, a little bit of a bump up in specific reserves and Some risk rating migration also impacted the reserve. And if you look at Slide 16, you see a waterfall chart of all the different factors that impacted the reserve this quarter. Specifically, the Cree office portfolio, the reserve was up to 99 basis points compared to 83 at June 30.

Speaker 4

So A little bit of build there as well. Last quarter, we provided you some stress testing results. We repeated those in the deck this quarter just in case You're interested, but they haven't changed. Nothing really to say about non interest income and expense this quarter. No real material or significant trends And I think Raj already mentioned that we would expect non interest expense for Q4 to remain relatively flat again.

Speaker 4

All of our capital ratios increased this quarter. Holding company CET1 was 11.4%, pro form a including AOCI 9.8 At September 30, so very robust capital levels and liquidity remains robust as well. There are some details on that in the slides if And with that, I'll turn it back over to Raj for closing comments.

Speaker 2

I would say that I was very good, not interrupting either of you. You were. Let's turn it over for Q and A.

Operator

Thank you. Our first question is going to come from the line of Will Jones with KBW, your line is open. Please go ahead.

Speaker 5

Hey, great. Good morning. Thanks for the questions.

Speaker 4

Good morning, Will.

Speaker 5

Hey, so Leslie, you guys said, I wanted to ask about the reserves. You guys have really, if you look back over the past 4 quarters or 5, You've really been fairly bullish since the end of last year. I can appreciate that I got this quarter was really another macro driven bill. But Just wanted to confirm that there's really not anything underlying you're seeing in the book that justifies any of this. I know classifies and criticized did see a little movement as well as Maybe some NPAs, but just wanted to confirm that and just as we think forward, just wanted to get your sense of what the messaging is on the provision as we look into next You really like the lion's share of reserve build is done from here.

Speaker 5

And to the extent that, yes, while we may be in higher for longer, A higher for longer scenario, Moody's is kind of stable that the reserve would do stay stable or if there's really Higher number in mind that the reserve needs to be at?

Speaker 2

Well, it's not really that we're trying to solve for a number. I actually joke with the management That was true. I gave

Speaker 4

you a very easy answer to your question.

Speaker 2

Yes. It is CECL has brought us to I joke about this often that the economists at Moody's And wake up on the wrong side of the bed and impact our P and L in any given quarter than anything else we do. So unfortunately, that is We're wedded to, so it will depend a lot on what Moody's puts out in 3 months from now and what how their outlook changes. That is a big driver. Now I will say this much that if going into a recession or a slowdown It's painful with all these bills that happened.

Speaker 2

It has the exact mirror opposite effect on the way out. So what can feel like pain can feel like gain a year down the road, but who knows. We'll not try to solve For a number that if we can get there by a certain amount of time, that's not what this is. This is purely based on the math That works off of Moody's forecast and I'm not sure how they'll forecast 60 or 90 days from now.

Speaker 4

Yes. And the other thing I would say, the other thing that It's having some impact and will continue to have some impact as we see the portfolio composition shift out of residential into commercial. You will also see the reserve Gradually build because the commercial portfolio does carry and you can see in our slides, we showed you the allocation by type of loan. So you will see some gradual reserve build as that portfolio shift continues to happen as well. That's the only other thing

Speaker 2

That's going to be gradual because the portfolio is not going to change overnight.

Speaker 4

Exactly.

Speaker 2

But gradually, absolutely right,

Speaker 4

Exactly. But there's nothing it's not like, oh my gosh, we're seeing trouble brewing in the portfolio, we better build reserves. It's not that.

Speaker 5

Got you. Got you. That's very helpful. I know CECL is really kind of a twin monster, but that's helpful. Thanks.

Speaker 5

And then I wanted to turn The margin, the margin, it was great to see inflect this quarter. It really feels like it was a story of the remix on the funding side and that's what's really been Partially enabled by some of those great deposit growth you're seeing and it feels like momentum is continuing there. And Raj, you mentioned the margin was up each consecutive month of Just curious where the margin ended the quarter, maybe what the margin was in the month of September?

Speaker 4

So I think I don't I think that's what Raj said.

Speaker 2

No. I think last quarter, we did give you get into the details of month by month. I'd rather not go into the make this a

Speaker 4

Month by month can be really quirky because if one weird thing happens in a month and you're annualizing a 1 month result, so I don't think looking at it month by month

Speaker 2

But we will say that Q4, We think it will be margin will be modestly up again. Unless there's something really bizarre that happens in the quarter, Based on what we're seeing so far, it looks like this trajectory will continue. It's not going to get to 3% in the next quarter, but it will It's improving from what it is.

Speaker 5

Got you. Okay. That makes sense. And I guess just Taking a little more intermediate term, to the extent that this deposit pipeline continues to materialize, you see Maybe a little less FHLB in the funding mix moving forward and you get some asset repricing that keeps flowing through. Do you feel like the margin continues to expand like through 2024 or do you feel like it

Speaker 2

So I'm under strict orders from Leslie not to talk about 2024 because we haven't done the whole planning cycle. So Over here now is Mike. We will give you guidance as we always do in January for the full year. But Right now, we'll just talk about Q4. And in terms of what we're trying You do in Q4 is not that different from what we're trying to do in Q3.

Speaker 2

Still optimize the balance sheet, grow the right things, bring down resi, bring down securities We keep doing that margin will fall in the right place And it should be a good quarter again. And I'll make one point about Demand deposit growth, I mean, that's what I'm actually the most excited about. We talked to you about a pipeline last quarter. The pipeline is similar this We did convert a lot of that to good business, but the net growth in DDA was about a little over $50,000,000 That's the net number, Right. What is very hard for us to predict is that sales that change that is happening in our existing deposits where people are moving out From DDA to interest bearing or just using the money for buying things, that trend is still Continuing, maybe slightly slower, but still continuing.

Speaker 2

And the reason we have some TBA growth is because The new business we're bringing in this quarter outpaced that natural trend that you're seeing all over the industry by the way. So we're so happy about the pipeline that we have, especially in light of what a challenging Q1 this was. To be able to stand here in October and say that we have a good pipeline and that we've in the last 3 months, we've actually converted enough of it to produce DDA growth, I'm very happy about it.

Speaker 5

Great. That's very helpful. The last thing I really just wanted to hit on, I know that the buyback has been big for you guys in the past, We kind of paused that conversation in the first half of the year with just naturally given what was going on, but it feels like now we've really kind of removed ourselves from that Kind of disruptive and it feels like where the stock is trading today, it's just a huge opportunity for you guys. Is there any update on where you stand with the buyback?

Speaker 2

Last we talked to the Board about it and unanimously agreed that the time was not ready yet, was maybe 6 weeks ago, Leslie, right, about 6 weeks back. We will talk to them again in 4 weeks in mid November. My best judgment would be, I think it's still early. I think we need to wait And probably think about it in the New Year, not this quarter.

Speaker 5

Got it. Understood. Thanks for the color, guys.

Operator

Thank you. And one moment while we get to our next question. And our next question is going to come from the line Graham Dick with Piper Sandler, your line is open. Please go ahead.

Speaker 6

Hey, good morning, everybody.

Speaker 2

Good morning.

Speaker 6

So I just wanted to hit on the loan side of things. I saw that you had about the $300,000,000 in commercial loans that you exited. I just wanted to hear a little bit more about your strategic thinking here. What kind of yields are on these portfolios or what kind of spread rather if you can include the deposit relationship? And then you mentioned that there's a little more to do here.

Speaker 6

I'm just wondering What that would look like maybe over the next couple of quarters and how it might impact your overall growth outlook? Because if I back this out, the $300,000,000 this quarter, It's like balances were actually essentially flat. So just wondering about the size of loan portfolio going forward and maybe the overall direction that takes the balance sheet as well?

Speaker 2

Let me go sort of loan category by loan category. So resi was down 225. I expect resi to behave very similarly next quarter for that matter, even the quarter after that 2 or 3, 4 quarters. Because like we've said, we're too veggie heavy and taking it down about $200,000,000 or so every quarter Sounds like a good strategy. C and I was up $100,000,000 but that was net of about $300,000,000 that we pushed out.

Speaker 2

As Tom said in his comments, we don't see that kind of a push out happening in the future, maybe some here or there that we will still exit. The stuff that we're exiting generally is non deposit transactional business. Some of them are SNCs And where we don't really have an expectation that we'll be able to get deposits. Sometimes you just do it and eventually But when we convince ourselves this is not happening and spread is too tight, then what are we doing in that? And that's what we've exited.

Speaker 2

I would say that what we were exiting, the business put on a year or 2 years ago, it spreads of like so for plus 150 to 200 in that range. The business that we're doing now, the pipeline that Tom referenced in the C and I space is over 300. So, silver plus $300,000 $320,000 $330,000 in that range. So, it's a really good time to be writing new paper And the old stuff is that is being run off is meaningfully lower in terms of profitability. CRE, while we grew about $45,000,000 $46,000,000 Just looking at the pipeline, it doesn't look like it's going to grow given there's not much happening in the CRE world in terms of transactions.

Speaker 2

So our best guess is it will probably be flat. Small business will grow, but it doesn't really move the needle that much In terms of the total balance sheet and our commercial finance subs, which is the franchise finance and the equipment leasing business Has been running down now for a better part of 2 or 3 years, and that trend will continue. So when we're out lending, your guess is ours, this is mine. I always say this, it can't go any lower utilization, but it keeps surprising me, it does go down. The mortgage market It's probably having one of the toughest years ever in terms of origination volume.

Speaker 2

So it's very much tied to that. If there's a bit of a pickup In rates, turnaround doesn't feel like they are going to, but if they do turn around, there's a little bit of a refi opportunity, it will grow, otherwise it won't. But again, the numbers are so small. I don't think it really moves the needle at the top of the house.

Speaker 3

Yes. I might just add a little bit of detail to that. If we look at when you exit, there's 2 kind of time frames for exiting. 1 is when you have maturity. Those are obviously easier to predict.

Speaker 3

The second is when you have an event. And usually, the event is a redial because there's a transaction opportunity Or whatnot, those are not as easy to predict. So, while I don't think there's going to be too much more of that to the extent that it was In Q3, from a strict maturity perspective, there are situations that could come up With existing credits that are not maturing, where there's an opportunity to exit because what's really clear as we look through the dynamics of this Trade off that we're consistently making is if you take any large credit in the marketplace, let's say, it's a $50,000,000 deals and we have the opportunity to exit that. We can put on $225,000,000 deals in bilateral relationships. It's probably at 75 basis points higher than what we're exiting and comes with deposit and treasury management business.

Speaker 3

And that's the trade off we're Consistently looking to make.

Speaker 6

Okay. So all in it, it kind of sounds like flattish Maybe slightly down loan balances as a whole, but a much more profitable portfolio. Is that kind of a fair way to look at it right now?

Speaker 4

Yes. I think over the course of the next quarter, yes.

Speaker 2

Okay. Cool. And then I

Speaker 6

just you mentioned Shared National Credits in there. I just wanted to know What's your all's total SNC exposure right now as a percentage of loans?

Speaker 4

It's about 4,700,000,000 In the aggregate, based on the strict regulatory definition of a shared national credit, which is Tom, if you want to provide any more color on the question.

Speaker 3

The definition has expanded A lot over the last couple of years. So it can encompass anything from what you might think of as being a traditional Shared National Credit, which would be a multi $1,000,000,000 credit led by 1 of the major banks with 25 banks in the deal To a deal that we agent as long as the debt stack is more than $100,000,000 it can be deals that we would typically be in that are club deals Among us in a couple of banks where we have a significant share of the wallet, we might be the collateral agent, we The DOC agent, we could be in a couple of different positions. We would have part of the depository business. So

Speaker 2

When you look at kind

Speaker 3

of a classical Shared National Credit business, it's a portion of the overall SNC business, but it's certainly not the entirety of it and the other parts of it. We have built syndications capability on both the real estate side and the corporate banking side. We want to syndicate credits. We want to be a lead bank and control the deposit business. So that portion that would be over the $100,000,000 threshold would have 3 or more banks would be a SNC.

Speaker 3

And we continue to be interested in club deals where we like a relationship and have business, But we have a certain guideline on how much exposure we want to take in those deals. That's highly desirable business from our perspective, but it would It will be a snick. So as the guidelines have changed over the last few years, you've got to be a bit more Careful with this nomenclature than maybe we were a few years ago.

Speaker 6

Yes. Totally understand. And I get if you don't have this number, but definitely seems important and much more profitable to be the lead agent on these deals. What amount of that 4.7 are you guys the lead on?

Speaker 4

We don't have all of that detail available right now. Yes, absolutely.

Speaker 3

Far better to for a variety of reasons to be the agent On the deal because generally the agent gets 75% of all ancillary business, although in the SNC market today, Everybody wants part of the ancillary business and that's a big challenge in the stick market is there's not enough ancillary business to go around everybody.

Speaker 6

Right. Yes, understood. And then I guess the last thing I wanted to touch on is just capital and CET1 ratio maybe Including those AOCI losses of 9.8%. Yes. Is this the ratio you guys are managing around right now?

Speaker 6

And then is there a specific near term, I guess, level you guys

Speaker 7

are looking

Speaker 4

at? I mean, I would say this tends to be the ratio that most Stakeholders are focused on and interested in, so we do pay a lot of attention to it. It's not the only one that we look at. Obviously, we're aware of TCE to ETA and Tier 1 and leverage as well. I think in terms of a target, like Raj said, I think In the very near term, we're comfortable where we are and we'll as we go through our capital planning process at year end, we'll think through and discuss with the Board The outlook going forward around target.

Speaker 4

Another way of saying I'm not prepared to get that information today.

Speaker 6

No, understood. All right. Well, thank you guys. I appreciate it.

Operator

Thank you. And one moment while we move on to our next question. And our next question is going to come from the line of Jon Arfstrom with RBC Capital Markets.

Speaker 7

Hey, thanks. Good morning.

Speaker 4

Good morning, John.

Speaker 7

Wesley, I'm not going to ask you about the 24% margin, But,

Speaker 4

To take you do, I won't answer you.

Speaker 7

The question is that you made a comment about over the course of the next quarter, this trend is going to continue. And I don't know if it's for you or Raj, but how long does it take to accomplish what you want to accomplish On the balance sheet, remixing the assets and remixing the liabilities. I hate the term what inning are we in, but I'll just ask it, how long does it take to get to where you want to go?

Speaker 2

I think we'll be in a better position to answer that once we go through our year end planning process. So we'll probably be able to answer that in January.

Speaker 4

I mean, I think it's safe to say it's not a 1 or 2 quarter effort. It's going to take some time.

Speaker 7

Yes. So we can expect more of the same essentially. I mean we have to make some assumptions, but we can expect more of the same over time. Okay.

Speaker 4

In the near term, sure.

Speaker 7

Yes. Okay. And Raj, what do you want the balance sheet to look like when you're done?

Speaker 2

Well, I wanted to If you look back at our balance sheet pre pandemic levels and compare it to now, it looks quite different. It's gotten Too heavy in securities, too heavy in resi. And I think the pre pandemic norm is Where we want to take it. We don't want to take RISI down to 0, but we certainly have a lot of work to do in bringing it down to a more sort of reasonable level. And so I think a good guide might be going back to 20 eighteen-twenty 19 and taking a look at our mix, Not just with loans, but also with securities.

Speaker 2

I think that's what we're looking for. On the right side of the balance sheet, obviously, We don't want to go back to 2018, 2019. We want to kind of make progress on where we are today at 28% DDA. I'd like it to get to 32%, 33% DDA. And I think we can get there over time.

Speaker 7

Okay. Okay, good. Anything you'd call out on the non interest bearing growth This quarter on the drivers.

Speaker 2

No, nothing extraordinary.

Speaker 4

I think it's just across the franchise, just continued progress pursuing that pipe

Speaker 3

Lots of new relationship wins.

Speaker 7

Okay. Yes, I guess that's what I was getting at as well. Okay. And then, Tom, maybe a question for you, last one for me. But, I understand what you're saying on the commercial Office, the CRE office portfolio.

Speaker 7

I'm curious if what the discussions are like when these renewals come up? How difficult are they with your clients? And then secondarily, is there anything different between what you're seeing in New York and Florida? Thanks.

Speaker 3

Yes. I would say, the renewal discussions generally As the metrics show, the portfolio is performing very well. So right now, there is We have seen a couple of opportunities pay off because people have gone to the CMBS market, but there's not a big Alternative market for office right now, I mean, everybody's kind of got what they got. There's some small openings here and there, But generally, our renewal conversations are going well because the performance of the properties is generally very good. And we know we have strong debt service coverage ratios.

Speaker 3

We have strong leases, not in every single property. Obviously, there's Always a couple of the loans that you're looking at that are slightly different. But generally, the occupancy is very good. The lease rollover It's manageable what they have. As I said, the total 12 month lease portfolio rollover is about 11%.

Speaker 3

So, the conversations generally go pretty well. I mean, our properties in New York, We don't have that big of a when I say New York, I'm specifically referring to Manhattan. Our properties in Manhattan, we have Half a dozen or so, the lease rates are in the mid-90s. The properties have low levels of leverage and are performing well. They're starting to see a gradual return To the office, I'm not sure what inning we're in, but we're in the early part of the baseball game, but they're reporting People are coming back to the offices gradually.

Speaker 3

When we're around our office on 57th and Park, there's certainly a lot of people in the street. If you look at ridership on the subways, if you look at the metrics that people are following, people are gradually returning back to the office. We're going to see that portfolio gradually be reduced over a period of time through amortization and some Selected movements to the CMBS market, but it's Fairly stagnant right now, but performing well.

Speaker 7

Okay. And maybe to Florida versus New York, is there any material difference? I know there's It's all granular, but anything there?

Speaker 3

Yes. The difference in well, Florida is different From New York and then different markets in Florida are different from different markets in Florida. So if you look at The Miami market in particular, where we do not have any CBD exposure, but the Miami market is extremely Strong right now. The Palm Beach market is very strong. Tampa continues to show good strength, particularly in the suburban Market area, we have an Orlando portfolio that again is not a CBD portfolio, But predominantly in the northern suburban office markets, all of those continue to perform very well.

Speaker 3

These are typically 3, 4, 5 story Suburban buildings that house medium sized businesses that are located close to where the employees live and general trends are People are in the office 3, 4 days a week and the properties are performing well.

Speaker 7

Okay. All right. Thank you. Very nice quarter.

Speaker 4

Thank you. Thank you.

Operator

And one moment as we move on

Speaker 7

to our next question.

Operator

Our next question is going to come from the line of Steven Alexopoulos with JPMorgan. Your line is open. Please go ahead. Good morning. This is Janet Lee on Firstiva Alixopoulos.

Operator

I want to

Speaker 8

go back to reserves for a second and how the higher rate forecast for Moody's is the largest driver of the build in reserves. Is this really tied to your assumption that rates higher for longer will increase the odds of a recession? Yes.

Speaker 4

It's not tied to our assumption. It's the assumption that's embedded in the Moody's economic forecast that we see the model.

Speaker 2

Moody's assumption.

Speaker 4

Yes, it's Moody's assumption. This is not tied to our assumption. But It is certainly tied to the fact that in the model, a higher rate environment Put some stress on maturing and repricing loans and that's the driver. I mean these models are extraordinarily complex, Janet, but yes, at a high level, that's what's going on there. And there are other things that work in there too.

Speaker 4

That was just the one that had the most impact.

Speaker 8

Right. Okay. Because when I was looking when I was comparing Moody's August and May forecast, Unemployment assumption hasn't changed through 2025 and how much change in GDP.

Speaker 4

Actually at a regional level, the trajectory of the unemployment path has I know everybody wants to look at the national unemployment rate and national GDP and correlate to that, but these models are just Far more complex than that and I can't get into all those details. It's just there's a lot going on. My point is there's a lot going on in there besides just national unemployment

Speaker 8

Okay. So your scenario contemplates like local markets, it's not just Generic, National.

Speaker 4

Yes. That's how these our models work. It's based it's done at the submarket level. Yes.

Speaker 8

Okay. Got it. And can you remind me what unemployment rate is embedded in your current reserves then?

Speaker 4

Well, it's different in New York than in Florida. It's different in Miami than in Tampa. It's different in so that's A pretty complex question, but

Speaker 8

it's Okay. No overall.

Speaker 4

It averages somewhere in the low 4s.

Speaker 8

Okay. And just following up on reserves, looking at the franchise finance segment,

Operator

Are you seeing

Speaker 8

any stress building in that segment? It looks like it's more

Speaker 4

It's really one loan, Janet, that migrated down to non accrual this And it's a kind of a COVID leftover, I would say. They just never were able to dig their way out.

Speaker 8

Okay, got it. And last question on NIM and NII. So is it fair to say like theoretically Speaking, you'll get more benefit from NIM point of view if the Fed cuts rates sooner when considering your portfolio mix? Or do you get more benefits if rates stay higher for longer and benefits the fixed asset repricing?

Speaker 4

To be honest, Janet, the most impactful thing is mix by far. Funding mix and loan mix are far more impactful. The balance sheet, the Static balance sheet is relatively neutral from an interest rate risk perspective. So mix, how the mix evolves is the thing that really will impact the NIM much more So then what the Fed does or doesn't do?

Speaker 2

EBITDA growth. That's why it's the number one priority in the bank.

Speaker 8

Yes. All right.

Operator

Thank you.

Speaker 4

You're welcome.

Operator

Thank you. And one moment while we move on to our next question. And our next question is going to come from the line of David Bishop with Hovde Group. Your line is open. Please go ahead.

Speaker 9

Yes. Thank you. Good morning.

Speaker 2

Good morning, David.

Speaker 9

Thanks. Quick question, Raj, Leslie. You guys have done a nice job tamping down the level of expense growth. Anything looming? I know you haven't done budgets for next year, but anything looming that could drive that growth rate materially higher next year?

Speaker 9

Are there any Pending team lift outs or teams you're targeting that could move the needle there materially?

Speaker 2

Actually, we forgot to mention on this call that we did hire a C and I head for Texas. So last quarter, I think we told you about CRE business had been launched. It took us a little longer than I would have wanted On the CMI front, but a press release on that hiring will be going out in the next day or 2. So outside of that, We're always looking we did make some good hires in April, May timeframe. So there's nothing in particular that jumps out that there's a big team or anything, but there are always producers that we're bringing in.

Speaker 2

At the same time, Remember, we're keeping expenses flat. So there are some people that were changing out as well. Our focus is so much on deposit growth and DDA growth. If you don't cut that, your incentive plan may have changed so much that some people might choose to not be here. So I would say there's a little bit of recycling that has happened simply because our priorities are so focused on the right side of the balance sheet.

Speaker 2

So, but there isn't any other notable thing to talk about other than the C and I hire that Started, I think this Monday, right Tom?

Speaker 3

Correct. Yes. Got it. Appreciate that color. We're always Consistently trying to improve the mix and talent of the people that we have.

Speaker 3

I mean, that's a constant process that talent management is Continuously working on attracting the right talent and you always will have people that are not Meeting whatever standard we set and also having the discipline to make those mix changes is important.

Speaker 5

Got it. And then

Speaker 9

in terms of the deposit success story this quarter, curious Raj or Tom or Leslie, Can you attribute some of that to Texas or

Speaker 2

you start to see

Speaker 9

that contribute to the bottom line? And I don't know, had you disclosed the dollar amount of the deposit pipeline? If so, Just curious where that stood relative to last quarter?

Speaker 3

I would say when you look at it's The C and I portfolio in particular is so granular across the board. I would attribute it more To efforts in certain segments of the loan categories in C and I, if I look at what grew For the quarter, we grew what I think is really kind of core parts of our business strategy, which was manufacturing, Wholesale trade, logistics, international trade because of the markets that we're in, healthcare had nice growth. Those are really the four Segments of the C and I portfolio that grew most, but it's across it's a little bit across the board In every segment that we're in, we're we've seen good growth in what I would call our more traditional long term markets, and We've seen nice growth in the newer markets that we have opened up over the last few years.

Speaker 9

And that was that also translated to the deposit side In Texas?

Speaker 3

No, no. And typically, again, back to this word mix that we're using a lot. When you start off a new office, generally, the relationships tend to be more loan oriented. And over a period of time, You're able to then expand once you create reputation in the marketplace. You create some critical mass.

Speaker 3

Anytime you enter a new market, it's a multiyear strategy to fully develop that market out. And Markets that we want to go to are attractive and competitive. We have not been able to find any attractive and non competitive Markets to go to. Raj keeps asking me to find one, but I can't seem to find one. So it takes the right talent and time to build these.

Speaker 3

They tend to build faster on the left hand side of the balance sheet than the right hand side of the balance sheet.

Speaker 9

Got it. And one final question. Leslie, the tick up in special mention loans, just curious if there's any segments or industries that you call out to drive that increase?

Speaker 4

Yes. No, there really is nothing in particular to call out. I think this looks to us more like normalization of credit. There don't tend to be any particular portfolio segments where we're seeing signs of trouble. And the other thing I'll say is We don't really at this point in time, we don't really see any real loss content in any of those assets that migrated to special mention.

Speaker 3

Got it. Appreciate the color.

Operator

Thank you. And one moment for our next question. And our last question is going to come from the line of All right. We will go ahead and I will go ahead and hand the conference back over to Raj Singh for any further remarks.

Speaker 2

As always, thank you very much for joining us and listening to our story. We feel pretty good about where the bank is And the progress that we've made in a very short period of time. We look forward to speaking with you again with a lot more information in 3 months. Until then, stay safe. Thank you.

Speaker 2

Bye.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
BankUnited Q3 2023
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