BankUnited Inc (BKU) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BankUnited Third Quarter Earnings Conference Call. (Operator Instructions) Please be advised today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker host today, Susan Greenfield, Corporate Secretary of BankUnited. Please go ahead.

Thank you, Olivia. Good morning, and thank you for joining us today on our third quarter results conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer.

Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that 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, without limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-19 pandemic.

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. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2020, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website, www.sec.gov.

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

Thank you, Susan. Welcome, everyone. Thank you for joining us for our earnings call. Let me make a quick few remarks about the -- what we're seeing in our markets before we get into our results. Three months ago, when we met you on this call, Delta was beginning to surge. Florida seemed to be in -- caught up in it more than probably any other state. And there was a lot of concern as to whether that will impact the economy and to what extent. I'm happy to report 3 months into it. Now Delta seems fairly in the rearview mirror. I checked the numbers just a few minutes before this call. I think they've come down to even lower than they were 3 months back.

So we're happy about that. But we're most happy about is also that it did not actually have the same kind of impact that previous surges have had on the economy. I think the economy is learning to live with these surges as and when they happen, hopefully, there won't be any more, but at least over the last 3 months, we did not see a significant impact to the local economy here or in other parts of the country where we do business. But it's good to see Delta behind us, obviously, with a fair amount of pain that everyone took on the healthcare the side.

We -- the Delta surge did put our plans about return to office on hold a little bit. We have started bringing people back in in the summer. We had to take a pause. Later today, I will be making a call internally and we will -- we're talking about how we're going to restart that process. Our expectation is that by January, 1st week of January, we will be in the new normal and between now and then slowly start bringing people back.

We're going to start that, believe it or not, even for board meetings. We've not had an in-person Board meeting since the start of the pandemic. Yesterday, the Board met telephonically and decided it was time to start meeting in person, our first in-person Board meeting, which will be over 2 days in the middle of November. So I'm excited about that too. Overall, the economy here in Florida is doing well. There are obviously widespread labor shortages and supply chain disruptions that everyone has talked about. We are seeing that. Our customers are feeling it indirectly, we're feeling that as well. But it's hard for me to say when those will resolve themselves, but that is the challenge that we're dealing with.

I look at this, the biggest economic and crisis of our lifetime that we went through. In 18 months into it, if all we're dealing with the supply chain issues and labor shortages, I think that's a pretty good place to be. This could have been a lot worse. So I take this as actually a victory that these are the issues, this could have been a lot worse. So I'm thankful for where we are and how this pandemic has been resolved.

Quickly getting into our quarter, we posted net income of $87 million or $0.94 a share. This compares to $104 million we posted last quarter, which was $1.11 per share. The annualized returns so far for the 9 months so far, our return on equity is 12.4%, and return on assets of 1.09%. Net interest income declined slightly to $195 million from $198 million last quarter, but it was up compared to the third quarter of last year, which I think at that time, it was $188 million. And then contracted to 2.33% from 2.37% mostly because of lower asset yields and less than expected commercial loan growth. Also, less PPP impact this quarter versus last quarter was also a large reason for that contraction of NIM.

Cost of deposits, as we've been telling you, has -- continues to come down. We dropped 20 basis points this quarter. It was 25 last quarter, so 5 basis points reduction in the cost of deposits. On a spot basis, we were actually at 19 basis points. And I checked last night, we're down another basis point, so at 18 basis points as of yesterday. So the story on the deposit side continues. We also have decent growth in deposits specially DDA -- noninterest DDA grew by $324 million. Total deposits shrank, but we did that very meaningfully. We're not trying to grow the balance sheet, growing balance sheet and hanging things up in liquidity, it does not really create value for anyone. Instead this quarter, we decided not to build the balance sheet. We shrank it and freed up capital and bought back stock quite strongly.

In fact, one of the things the board did yesterday, when we met is approve another $150 million buyback, given that we are going to wind down the authorization that we have based on how we believe we bought stock this quarter. Also, the fact that the stock was around $40 or so makes it very easy in my -- from my perspective, given where our book value is, we're trading at such a low multiple, it's so easy. It doesn't take much of rocket science to figure out that it's a good buy. So we've been aggressive and we've been buying back and we've gone through much of the authorization.

Loans, total loans, excluding PPP loans, they grew by $74 million. Residential business remains strong, as has been the case the last several quarters, commercial segments, the payoffs outpaced production. On the production side, actually, we were pretty happy our production -- we try to go back and said, let's see what we were doing pre-pandemic, and we compared the production this quarter to the third quarter of 2019. The production was actually higher this quarter. But it's 2 things that we can't control. One, the payoffs and the other line utilization, those have been disappointed this quarter, which is why it all adds up to only about $74 million of growth into the loan portfolio.

What else? Credit, I would say nothing but good news on the credit front. I know these days credit is not on people's mind. It should always be on everyone's mind. That's the primary risk we take as a bank. So I'm happy to report on the credit front, criticized, classified have declined by $240 million, loans that are on temporary deferral or modified under the CARES Act also declined to $285 million. They were $497 million, I believe, end of last quarter. So almost cut in half. NPL ratio also got better. It was 1.21% this quarter. Last quarter, it was 1.28%. By the way, that includes the guaranteed portion of the SBA loan. So if you exclude that NPL ratio is actually 99 basis points. The $69 million large commercial loan that we spoke to you about last quarter. It's -- the resolution of that is moving forward. We're pretty happy with how we reserve for it and feel very comfortable in that level of reserve. Net charge-offs annualized was 19 basis points last year. I think we were at about 26 basis points. So good news on the Net charge-off front as well.

Capital book value has grown to $34.39 Tangible is at $33.53. And of course, as of September 30, what we had $58 million left in the share buyback, but we're adding another $150 million to that. And going forward, in terms of buybacks, again, we will remain opportunistic given the volatility in the stock market, and we will continue to execute on that.

I'll -- before I hand this over to Tom, let me say sort of what are the top things in my mind in terms of what we're trying to achieve in the short to medium term. Basically loan growth, but not reaching for loan growth as in getting caught up in that and going outside of a risk block. That's not acceptable. But loan growth restarting the growth engine on the left side of the balance sheet is the top priority. Continued improvement of deposits. While we made a lot of progress on that, I think there is more work to be done there, especially in light of the fact that eventually rates will rise. We may be 9 months, maybe less, maybe a little more, but some -- away from a rising rate environment and we have to be ready for it, and we're basically working on our deposit business to be able to do just that.

In the very short term, let's return to office safely is another priority, and then launching in new markets. The new markets that we talked about last time to you, we don't really have much to share yet because it's not very prime time, but we have been working for the last 3 months on finalizing and hopefully, over the course of the next 3 months, we will make some announcements, and launch 1 or 2 new markets.

With that, I will turn it over to Tom, who will get a little deeper into the numbers before Leslie then takes us to P&L.

Great, Raj, thank you. So I wanted to spend a little time first on deposits, to give you a little bit more detail and perspective on some of the things that we're working on and what we achieved in the quarter. So as Raj said, average noninterest-bearing deposits grew by $749 million for the quarter, and $2.7 billion compared to the third quarter of 2020. Period-end noninterest-bearing DDA grew by $324 million, while total deposits shrank by $493 million. So when we break down a little bit, the $324 million of NIDDA growth for the quarter, it was, again, broad spread across all geographies, across all business units and very heavily focused on new client acquisition.

I'd also spend a little bit of time working on the deposit portfolio. The work that Raj is talking about has been a daily level of kind of bruising work that's not that glamorous, but we're working very hard on new account operating relationships, cross-selling within the book, ensuring that ECR rates are set at appropriate levels, really working hard on kind of the building blocks of this. And I think the 2 places that you see it, number one, are the continued NIDDA growth, obviously, in the $324 million. But also secondarily, if you look at service charges, deposit fees on accounts was up 33% for this quarter compared to the same period last year.

So we're really starting to see excellent kind of cadence and rhythm in both continued NIDDA growth, continued opening of new operating account business, which is really our central focus as a strategy and continuing for surging in the level of service charge revenue that we have from these accounts. So all of that is a big part of what Raj talks about when we're talking about the entire deposit mix and the quality of the deposit book.

A little further down, money market accounts declined by $1.1 billion this quarter, as we continue to execute the strategy of the quality of the base. We have looked hard at accounts that we think are highly susceptible to increases in rates once we get into a different interest rate environment. And we've taken a lot of steps to ensure that we're moving out deposit accounts right now on a proactive basis as we continue to grow the operating account business and take advantage of that entire dynamic to have just an overall better quality book.

Switching to the loan side. As Raj said, excluding PPP loans, the total portfolio grew by $74 million in the third quarter. Residential continued to be strong, reflecting the strength of the housing market and the rate environment. The overall resi portfolio grew by $751 million for the quarter. Of that, the EBO segment was $50 million, and the pure residential correspondent portfolio grew by $701 million. In the mortgage warehousing business, which has also benefited from a strong housing market. There, we saw a decline of $141 million for the quarter. Most of that is starting to see some normalization in this segment as refi activity begins to moderate and we see a little bit lower line utilization in this area, although we continue to be interested in growing commitments and expect our commitment book to grow in the short term.

For the C&I business, it was up $13 million for the quarter, including owner-occupied CRE loans, and I'll talk a little bit more about what we see in that segment. The remaining commercial portfolio declined for the quarter. The largest decline was in CRE, including multifamily, which was down by an aggregate of $317 million for the quarter. The New York multifamily portfolio, which you all have been following now with us for a number of years, declined by $76 million for the quarter. But at this point, we believe that, that's stabilizing. That's the lowest level of runoff that we have seen in a number of quarters, and we're actually starting to see some positives in the multifamily market in New York.

I'm sure you all have followed that we're starting to see rent increases in the market. We're starting to see people return back to the New York City multifamily market, schools are reopening and things are happening that are driving people returning to the city. There's been an awful lot of data out in the last couple of months about rent levels even with concessions, improving back to sort of pre-pandemic levels, and we are looking at new opportunities now in the multifamily space within the New York market. So we're feeling better. We're feeling good about the portfolio we have today at the current level that it's at, and we're feeling better about the short-term growth opportunities within multifamily in New York.

I'd land a little bit more on Raj's comments about production. When we looked at production across the commercial lines, especially the C&I, CRE and small business areas, it was better than pre-pandemic levels for the same quarter. We are seeing a reasonable return of pipeline, particularly in the C&I area, where we have a large pipeline heading into the fourth quarter and the first quarter of next year. So we're seeing clients investing more. We're still fighting through kind of low utilization rates. And even really the accounts that we're bringing on from an NIDDA perspective that have lines of credit with them, even those lines are coming in at pretty low utilization rates. But we think ultimately, that patience will pay off for us and as people start making more CapEx expenditures and growing more solidly in 2022, we believe these relationships, including the existing ones we have, we'll start to see improvements in these areas. But actually, overall, production and pipeline build, we feel pretty optimistic about right now heading into the fourth quarter and heading into 2022.

Yes, line utilization bottomed out in the first quarter. It started to improve all through the second quarter. So we were pretty optimistic because we're seeing a very steady trend of improvement. But in the third quarter, they've really stagnated. So it hasn't gone down, but it really hasn't come beyond where it was in the second quarter. So -- and to transpoint, from the new business that we're writing, the line business. It comes on, the utilization levels, especially in that new business is very low, lower than the existing book as well. So it's all dry powder. So when these bottlenecks in the economy are resolved, this should create growth, but it's hard for me to say it was going to happen a quarter from now, 2 quarters or 3 quarters from now. But that's sort of what we're seeing.

Leslie? Tom, you were done?

No, I was...

Oh, I am sorry.

I was going to give the PPP update. As for PPP, $159 million in the first draw PPP loans were forgiven in Q3. As September 30, there was a total of $49 million in PPP loans outstanding under the first draw program and $283 million of outstanding under the second draw program. We expect to open the forgiveness portal for the second draw program next month. But obviously, this is kind of winding down at this point.

A quick update on deferrals and CARES ACT modifications, Slide 16 in the supplemental deck also provides more detail on this. For commercial, no commercial loans were on short-term deferral as of September 30, $244 million of commercial loans remained on modified terms under the CARES Act compared to $436 million at June 30. The largest decline in loans modified under the CARES Act was $144 million decline in the hotel portfolio. The hotel portfolio, particularly in Florida continues to rebound. And if you've tried to get a hotel in certain areas of Florida lately good luck, particularly in the keys and other coastal properties, just the occupancy has really returned strongly there. So we're feeling good to see that change come about. To date, $414 million in commercial loans have rolled off modification, about 100% of these loans have either paid off or resumed regular payments.

From a residential perspective, excluding theGinnie Mae early buyout portfolio, $40 million of loans remained on short-term deferral or have been modified under the longer-term CARES Act prepayment plan at September 30. Of the $533 million in residential loans that were granted an initial payment deferral, $493 million or 92% have rolled-off. Of those that have rolled above 95% have been paid or are making regular payments. And I think the last thing I'd say on the loan portfolio is also when we look at the $74 million in growth. Keep in mind that we had $175 million of payoffs in criticized and classified loans. So while it certainly impacted the loan growth number, it did contribute to the overall improvement in the credit quality, and we're happy to see that.

So with that, I'll turn it over to Leslie.

Great. Thanks, Tom. Give a little bit more detail on the numbers for the quarter, starting with the NIM. The NIM did decline this quarter to 2.33% from 2.37%. The PPP fee recognition had a bigger impact on the NIM last quarter than it did this quarter. If we factor out the impact of PPP fees and the impact of increasing prepayment on some of our securities, the NIM actually would have been flat quarter-over-quarter.

Loan growth was resi this quarter, not commercial. Had we seen more commercial growth as opposed to residential growth. We likely would have seen some uptick in that NAV. The yield on loans decreased to 3.45% from 3.59% last quarter, recognition of PPP fees. The differential in that quarter-over-quarter that hasn't been for that, the yield on loans would have declined by only 6 basis points for the quarter. And most of that 6 basis points really was attributable to the shift from residential to -- from commercial to residential. Eventually, obviously, we believe that pendulum will swing back the other way.

I know you're going to ask me, so I'll answer you now. There's still $8.1 million worth of deferred fees on PPP loans remaining to be recognized. Almost all of that $8 million relates to the second draw program. So I don't really think we'll see much of that in the fourth quarter. Yield on securities declined from 1.56% to 1.49% and accelerated prepayments, which we think someday has to come to an end, but keeps not coming to an end. It just keeps getting faster on mortgage-backed securities accounted for almost all of that quarterly decline in yield.

Total cost of deposits declined by 5 basis points quarter-over-quarter. The cost of interest-bearing deposits down 6 basis points. And our best expectation right now is that NIM would remain relatively stable over the fourth quarter. But obviously, there are things that contribute to that that are a little bit difficult for us to predict, but that's our best expectation as of now.

And we can comfortably say the cost deposits will continue to drop for at least 2 more quarters.

Yes. With respect to the allowance and the provision, overall, the provision for credit losses for the quarter was a recovery of $11.8 million. Slides 9 through 11 of our deck provide further details on the ACL. The ACL declined from 77 basis points to 70 basis points over the course of the quarter. Most significant drivers of that change, a $2.3 million decrease related to the economic forecast. This is becoming less impactful than it has been in prior quarters, which is not surprising as things start to stabilize. A $4.5 million decrease due to charge-offs, another $3.7 million due to a variety of changes in the portfolio, including the mix of new production and exits. The further shift to loan segments with lower expected loss rates, primarily residential, impact on PDs of improving borrower financial performance, risk rating changes, et cetera. And a $5.9 million decrease in the amount of qualitative overlays, and this is mainly just a shift things that are now being captured by the models that last quarter we didn't think the models were adequately capturing.

The largest component of the reduction in the reserve was the CRE portfolio. The CRE model is particularly sensitive to unemployment, which improved this quarter, and the commercial property forecast also improved particularly for retail and multifamily, where we saw improving forecasted vacancy rates. There was also a reduction in criticized classified CRE loans, which impacts the reserve. We also saw the resi reserve come down. This was caused by residential loans continuing to come off deferral and resuming payments and changes in the economic forecast related to unemployment and long-term interest rates also had an impact. I'll remind you that almost 25% of the resi book is government insured and actually carries no reserve. C&I reserves actually ticked up a little bit as a percentage of loans this quarter.

With respect to risk rating migration, if you see -- you can see some details on this in Slides 23 through 25 of our deck. The total criticized and classified commercial loans declined by $240 million this quarter. Most of that was in the substandard accruing category, which declined by 2.52%. Special mention ticked up a little and substandard non-accruing ticked down a little. Total nonperforming loans decreased to $277 million this quarter from $293 million at June 30. The declines in criticized and classified assets really occurred across pretty much all portfolio segments with the largest decline in CRE.

Looking at other income and expense, there's not really anything material to call out this quarter on a year-to-date basis. We had initially guided to mid-single-digit increase in noninterest expense, and that still looks like where we're likely going to land by the year. And I would also note the 33% year-over-year increase in deposit service charges and fees, which Tom mentioned, and we're pretty happy about that.

ETR was a little lower this quarter, mainly due to a temporary reduction in the Florida tax rate. Last point I'll make, you'll see in the next couple of weeks, we'll be filing an S-3 shelf registration. Don't read anything into that. So you all don't feel like you need to call me, our shelf registration is expiring, and we just want to have an active shelf on trials we're not planning anything. So but you'll see that.

Now I'll turn it back over to Raj for any closing remarks.

No, I'll turn it over for Q&A. Let's jump into it.

(Operator Instructions) And our first question comes from the line of Ben Gerlinger with Hovde Group.

I was wondering if we could start on loan growth in general. It was great color and commentary from the opening remarks. I was curious if you guys could take a minute to kind of just walk through the competitive aspects of the markets you're working in? It seems like some competitors are doing a little bit stronger loan growth. But kind of just backing into the math and probably doing it at a lower rate. So with the payoffs you're seeing in the line utilization somewhat plateauing recently, are there areas of kind of low-hanging fruit that we should expect to see in terms of growth and kind of the dynamics you're working through? And then any update on the potential lift outs in more granularity would be helpful.

Sure. In terms of production, as Tom said, if you just look at gross production levels, we were pretty happy with where the quarter came out. The only place where we're not active at -- we deliberately pulled back our areas that are still impacted by the pandemic. So we're still not, for example, leading into hospitality or areas such as even office and the CRE front. But everything else is small business, corporate, commercial business and other aspects of CRE warehouse, industrial, multifamily. We are seeing pretty decent production, but we're seeing an enormous amount of payoffs. It just doesn't end. So I think all that adds up to the numbers that you see. Where we're seeing inordinate competition from a rate and structure, I would say it's lifecos that are doing very long-dated IOs, going out 10 and 15 years that we refused to compete in that space. That has been -- it's always been out there, but I think it's gotten very pronounced in the last few months. Very long-dated 10, 15-year paper interest only. And I just don't think that fits out risk appetite.

Yes. I would probably add when we use the word payoff, I would spend a little bit of time talking about what payoffs mean and largely payoffs for us are not clients that are leaving to go to a different bank. They are clients that are selling their companies, particularly within the C&I book. I mean, the level of M&A activity right now is just incredibly strong. And it's not only deep in larger businesses, typically, a couple of years ago, you would not see significant M&A activity in kind of your commercial lending businesses. And commercial, I would describe as being kind of a $10 million to $50 million sales company. We see significant activity M&A-wise even in that segment.

So the private equity push has been very significant in terms of what it means within our portfolio and how it's increased speeds. Raj is completely accurate on what we're seeing in the real estate space as it relates to lifecos and debt funds and others CMBS, the agencies coming in at terms and conditions and fixed rates and debt yields that are just really not bank deals. I mean, these are deals for different kinds of companies that have different cost of funding and stability streams of funding to be able to support that.

There's not -- in the markets that we're in, I wouldn't say there's any low-hanging fruit. We're in competitive places, and it's sort of a daily fight to do well. There are certain aspects that we're trying to focus on a little bit more going forward in certain spaces that we see we have added a fair number of producers. In the last quarter, we have several offers out this quarter and so reinforcing our teams, both in the markets that we're in and then the expansion markets that we're thinking about is a big part of the strategy.

Got it. Okay. That's helpful color. I appreciate that. And then, Raj, just thinking kind of the bigger picture. Now I would consider you to be kind of a top-tier steward of capital, great leadership in thinking for the longer term. So kind of everything you said of the strong production, payoffs are going to come and go, but they're really a little bit out of the control of the bank. You seem to have a pretty good handle on credit and your margin is -- if that's -- the sensitivity should be a little bit helpful as rates do increase. So given where the stock is today, why not do something more aggressive in terms of the share repurchase? I understand that you did a pretty sizable one in the third quarter, but what's preventing kind of making hay when the suns out in terms of the current valuation today of doing something more aggressive potentially even in Dutch?

Yes. I mean, we I don't have the exact numbers in front of me, but give or take, $150 million, which is 5% of our capital, we bought back in less than a quarter. So I'd say we were fairly aggressive. The quarter before that, stock was at an all-time high and we sat that one out, plus we were also trying to see will loan growth come back or not. So our philosophy on stock buybacks before the pandemic used to be, we'll just do a little bit every day. We're not going to worry about exactly what the stock price is.

This year, it's been a little different. We have been more opportunistic, more leaning into it when stock is lower and backing away when it's higher because I just see a lot of volatility even now for the next several months, I think there will be ups and downs. Nothing to do with us. It's just the market, right? One piece of bad news from Dr. Fauci or from somebody else and you can have big movements in the stock market.

So we will use that to our advantage. We're doing -- we're authorizing another $150 million between those 2 authorizations and what we started the year with, which was another roughly $40 million. That's a lot of stock in a year, and we'll keep doing more. And it's not like we're going to balance sheet. You saw our balance sheet shrink $400 million this quarter. So until we see the line utilization come back and growth squarely in front of us, this will continue on the strategy. We have a fairly good amount of room here given our capital position, which is still strong.

Somebody just waved to me and said it's $130 million is what we are for the quarter. So I was rounding the numbers there, not quite $150 million, but $130 million.

Our next question coming from the line of Dave Rochester with Compass Point.

Back on the buyback topic, you just mentioned, Raj, you'll keep doing more beyond this buyback. I was just curious, as you're looking at your excess capital position, how much do you think you've got in excess? Because you'll be growing loans, hopefully faster next year? Just curious how you're thinking about that.

Dave, we're kind of in the thick of our capital planning process for next year right now, and I'm going to defer providing specific guidance around that, I think, until our next call. I don't want to throw numbers out there preliminarily while we're in the thick of that process. But you're right, we do appreciate the fact that there's a lot of capital and there's room to go. So that's it.

I guess just given where the stock is, and I think you already mentioned this, if we're in the low 40s for at least a good part of the quarter, maybe not that long, but it would seem like you would continue that not necessarily aggressive, but being active in the buyback.

Yes...

(inaudible)

Yes. If the stock stays where it was, it has been for the last 3 months, we will continue to buy. If it goes up to $51, like it was the previous quarter, we'll probably pull back a little. So we'll just -- we'll trade it a little bit, yes.

Yes. That all makes sense. Okay. And then maybe just switching to loans. It was good to see some net growth there ex the PPP, and it sounded like you're down on the New York City multifamily runoff going forward. And you mentioned some positive dynamics there. Are you guys thinking that maybe you could see some growth in that book here? Or are you thinking that just stabilizes? And then can you just give an update on some of the other areas where you've mentioned runoff expectations? Either you're seeing some runoff on Bridge for a while? Are you good on that in the next quarter or so? Or do you think that runoff looks into the next year?

Yes. Let me take each piece of that. So I think we're good at where we are in the New York multifamily portfolio right now. We're encouraged by the underlying trends with people coming back to the city, especially coming back into free market type property. We have a pipeline for that product in Q4. So we're expecting to do new loans in that segment in the fourth quarter. So I would expect that it will stabilize and there's a better outlook for that asset class in that geography over the course of the next couple of quarters.

As it relates to Bridge, Bridge, I would I'd break into 2 separate components. One would be the equipment finance business, and obviously, the second would be the franchise business. So the franchise business was part of our fairly significant focus on asset improvement. We did see franchise -- some parts of the franchise business, particularly fitness, went through some real challenges in the COVID process, we did reduce the portfolio within fitness reasonably significantly, and we probably will continue to do that, especially in one concept. But the numbers at this point aren't as large as they were when we first went into it.

We've actually done some new franchise lending in the last 90 days. We're centering our strategy around what we think are the higher-performing concepts, better delivery models, better pickup models in that segment, and we did actually a fairly large loan this quarter, we funded it in that segment. So we do see opportunities within the franchise segment.

I think the -- within the Equipment Finance segment, it's a bit more challenging. I don't see as much runoff going forward, but it's -- when you look at that segment, the competition within the leasing business is extremely robust for CapEx schedules, and it's difficult. We saw some investment grade opportunities this week for 7-year fixed rate loans at 1% that the market gobbled up.

So while the credit was certainly good, we took a pass. I mean we just don't see a great risk reward return in that segment right now and given where the interest rate scenario is, one of the things that we're trying to be careful about is buying into very long-term fixed rate loans at a very low level now that could come back to bite us as rates grow -- as rates head up. So the equipment finance business, I'd be a bit less optimistic in simply because just the return dynamics are not very good in that business.

Yes. Okay. I appreciate all the color there. Maybe switching to deposits real quick. As you're trying to figure out what's maybe hotter money and what's not. How much more do you think you have to run off or that you want to move out at this point? And when do you think you'll get back to growing the book again?

Listen, I define growth in the book or growth in DDA, not in total deposits. So when I -- this quarter, we had total deposit declined $493 million, but I don't think that is an issue at all. That doesn't drive profitability. DDA grew $324 million. On average DDA, it actually grew a lot more because -- what was it?

$749 million.

$749 million. So we're growing deposits that matter. It's hard for me to give you a number on what we want to chase out, but there is still -- there are some large depositors. We also want to lower the average ticket size of the relationship. So a lot of the growth that we're focusing on and who are paying our people for is really smaller ticket growth. That doesn't create big numbers quarter-over-quarter, but it creates longer-term value that's far more important for us than just a large $30 million, $40 million, $50 million accounts.

So I take more consistent slow growth that will stick with the bank for 10 and 20 years then take big quick growth that won't. So what you're seeing is that internal change in the deposit portfolio. So it's hard to tell that from the outside, but inside, we're focused -- laser-focused on that, bringing down and not paying -- bringing down the average relationship size, deeper cross-sell of paying more for more cross-sold accounts.

So even within DDA, there's a difference between DDA relationship 1 and relationship 2. And we're distinguishing that, and we're paying people differently. So it's -- like I said, on the surface, it looks our job is done. We're at 33% DDA to total deposits and cost of funds now in the teams. But I know that internally, we still have more work to do. It may not change those ratios that much. It may not even move the cost of funds down that much, but it will improve the deposit franchise for the long term.

Our next question coming from the line of Steven Alexopoulos with JPMorgan.

Steve, you might be on mute.

I think we lost him.

Yes. We may have lost him. Let's go to the next caller.

And our next question coming from Brady Gailey with KBW.

Another one on loan growth, not necessarily near term. But Raj, when you look at BankUnited, when you look at the markets you're in, especially there in Florida, over the next 3 or 4 years or kind of longer term. What do you think is an appropriate growth rate to consider for BankUnited?

I think if you look backwards in our history over the time when we were growing 25%, 28% a year, I don't think we ever return to that level. I don't think that's appropriate for a lending institution to grow. But at the same time, if I look at sort of what is a sort of [75th] percentile level of growth, it probably is low double digits, give or take, 10%. That would be an appropriate level, but that's generally made up of lots of highs and lows because there is no normal in any one time, right? We're living through a weird time right now, and we may be living through something very different a year from now. But if you were to just for modeling purposes, the long term, think about it, I would say that field is kind of right in 11%, 12% both balancing, left side, and the right side of the balance sheet. But that is a very an approximation and an average of what can be a lot of loss and highs.

All right. And then Raj, I know you guys are not ready to talk about any new markets that you're expanding into. But can you just help us think about how big of a splash that's going to be? Like when you go into a new market. Will it be notably EPS dilutive with an earn back of 1 year or 2? Or how big of a splash do you think you're going to make when you do decide which markets to go into?

Brady, we've entered new markets in the past. New York was sort of the exception because it was just very unique. But when we entered Orlando or Jacksonville or even some of the newer businesses that may not be a new market, but when we did Tenneco or we did the warehouse business or pick any one of them, I don't think it materially impacts the bottom line for the first 12 months up or down. But -- because we don't try to jump in and start doing hundreds of millions of dollars right off the bat.

We take a more measured approach, at least for the first full year because usually, the team is new, you are trying build into your culture, you're trying to get comfortable with them and they're trying to get comfortable with you. And generally, we go through 1 whole year cycle before we start to put it into a year. So in 3 or 4 years, it will definitely be meaningful to the bottom line. But in 12 months, it's not.

So these are -- we never had the (inaudible) strategy on anything. It's always to there to make some investments. Some of them will pan out, some won't. And -- but we also don't want to do anything which will just be a distraction for the long term and never really add anything to the bottom line. There are ideas like that, that come up, which we be swat away because we don't want to get distracted by something 5 years will be $300 million. That's also a waste of our time and resources. But anything we do, the goal will be that over time, it will be successfully measured in billions of dollars, but not in the first 12 months.

All right. That's fair. And then the last question for me is on the PPP fees recognized in the quarter. I think last quarter, it was $4 million, it was $4 million. I think this quarter, you said it was down a little bit. What was the amount of fees recognized ...

It was less than $1 million, Brady. I think around $800,000.

And our next question coming from the line of David Bishop with Seaport Research.

Just a quick -- quick question with the build in the residential mortgage this quarter. Just curious if that had a material effect or you expect to have a material effect and in terms of your interest rate risk positioning moving forward? Just curious if that had much of an impact.

No, not really, [Brady]. The balance sheet remains moderately asset-sensitive. We hedge it at the top of the house. So it really isn't going to have a material impact on the interest rate risk position.

And remind us in terms of loan floors, just curious what we might have to see from a movement from the Fed to penetrate or have a significant impact on loan floors on the portfolio.

No. Again, I don't think so. There -- especially not with the movement from the Fed, I don't think you'll see a material impact from floors initially.

Got it. And then a housekeeping question ...

(inaudible) business where we have floors that are operative today is in the warehouse business. So it's not going to be that big of a thing.

Got it. And Leslie, how should we think about the effective tax rate? You said there was some noise this quarter. Just maybe how that pans out into fourth quarter and 2021?

I mean it will be down a little bit in the fourth quarter. And the main driver of that is probably more down around the 24% level. And the main driver of that is just that the Florida tax rate. Florida just enacted a law that reduced the 2021 tax rate to just a little over 3%. And then it goes back to normal in 2022. So I guess we'll take it all we get it. But that's the (inaudible)...

Remind me -- and what's the normal rate for 2022?

5.5%.

Our next question coming from the line of Jared Shaw with Wells Fargo.

This is Timur Braziler filling in for Jared. If we could just circle back again on the loan growth. I'm just wondering how much visibility is there to the level of future paydown activity or M&A activity in the space? And then when you combine that with the low utilization rates I guess, are we close to reaching an inflection point of kind of both of those stabilized? And how meaningful could that inflection point be?

So I'll answer them separately. When it comes to line utilization, we have almost no visibility. Even don't give us a heads up when they are going to call -- draw on the line or pay down a line. We often find out the same day or the day before. Our M&A activity and payoffs happening for those reasons, we have maybe a month's worth of view. But it's not like we know 1 quarter out or 2 quarters out, some people are going to sell their company or a building, we will only find out when it's -- the payoff is maybe 3 weeks away or 4 weeks away.

Production, we obviously have a much better handle on. We know what the pipeline is with a fair amount of certainty we know what we're closing this quarter, and we even know a decent amount for next quarter. There's always fallout that happens, things are delayed and all that stuff, but we have enough practice over the years to know what percentage would actually pipeline will close and what will this fizzle away, what will slip. That we feel pretty good about. Payoffs and line utilization is much harder.

Okay. And maybe asking the payoff question in a different way. Is much of that or do you get a sense that any of that is kind of pent-up activity from what didn't happen in 2020? Or are we in a new normalized level where we should just expect there to be more M&A activity moving down kind of a March up?

I think cost of capital has come down for everyone. That's what is driving it. It's a lot of money people happen to borrow at very low rates. And -- so cheap money will fuel M&A. That's validation.

Yes. I would say, in many cases, even our clients that are purchased in M&A transactions they themselves do not have visibility into it because they were not running a show. They -- many of these are unsolicited efforts by private equity to get into the space. I mean normally, if somebody is actually going to put the company up for sale and run a process. We tend to know that a little bit more in advance. But many of these are unsolicited moves by private equity to enter into certain industry segments with certain companies, and they kind of come out of the blue.

Okay. Understood. And then just if I could just one more follow-up on deposits. Some of the mix shift there on the interest-bearing side. The movement out of the savings and money market accounts and a slight uptick in time deposits. Are you trying to capture some duration? Are you getting any customer...

Those 2 things are really unrelated, the tick up and time deposits. It's not like the money shifted from directly the money market bucket to the time deposit bucket. Those 2 things are actually unrelated. What comes in time deposits kind of comes in. We're not really making a push in that space. The money market runoff was as Raj and Tom described to you earlier. And we're just reducing our exposure to some of these large accounts that we think may be price sensitive in a rising rate environment. So we don't think there's a relationship between the 2 things. They're not a direct [run] anyway.

Yes. CD [vessel] price between 10 and 20 basis points for the most part.

Yes.

Yes. In each quarter, obviously, we have runoff of what was a CD book that is maturing and we have that this quarter and (inaudible) ...

Kick up a little bit this quarter, but I don't think that was anything where we were out campaigning or advertising or anything like that.

Our next question coming from the line of Christopher Marinac with Jennie Montgomery Scott.

I want to follow up on technology, Raj, in a broader perspective. I mean how do you feel you're positioned now for your digital build out? What is left to do? Do you still think that you have what you need for the next 5 years for BankUnited?

Yes. So I've spoken about this at length a lot of investor meetings. I think you will never be done in technology. That's sort of the sea change in technology. I grew up in that mentality of do we have enough to get to $50 billion or $70 billion or whatever? Do we have enough technology, do we have to do more spend? I don't think we can think of technology in those terms anymore. I think it is a constant spend because it is evolving faster. And I don't actually think of that as a negative thing. I think technology is what is driving business now.

So the more you spend on technology is almost like we used to think about producers. You spend a lot on producers to grow business, you never ever thought twice about spending on producers or sort of that thing. I think it's the same with technology. It should enable business, it should enable a solving customer pain points. When you go find them and you can solve them, you can create an edge for yourselves in the marketplace and even capture market share. That's really the transformation that we've actually gone through over the last 4 or 5 years.

So to your question over the next 5 years, we know what we're spending on over the next 12 or 18 months, those projects are on the fly. But there will be more stuff that will come after that, which we may not have identified today, but there will be a budget that will be put in place, and we will find new niches and new customer pain points to solve and develop solutions for them and then go sell them and earn market share.

So it is a big culture of change inside of banking, and we are working heavily on commercial, payments hub is what we call that. That's our big spend over the next 12 months or so, which hopefully, by this time next year, we will be live. But I'm sure there will be something which will go beyond that.

Great. And I guess from your perspective, your competitive position is still as good as ever, if not better, as a result of what you've invested in?

Yes. Absolutely, it is, 4, 5 years ago, maybe we're doing a little bit of catch-up. But once we actually went on to the cloud, invested in the platforms that we have, I feel pretty good about where we are today. But I never want to get complacent and say, we're done. Now we can actually just chill and have the IT team take a breather, there'll be no breather. And there's always stuff that you will be working on. And I'm asking the front end of our company to work closely with the IT people.

If we -- all we do is sell our balance sheet. If we just buy and sell money, that is such a commoditized business that you were not going to make an outsized return on capital. You really have to start with defining a customer problem and then finding a solution that is unique and proprietary, solving it for that customer and then going out and finding 10 other customers like that and trying to sell it. That really is the heart of what we're trying to achieve medium and long term. And that's -- a lot of the success you see in the deposit portfolio and some of the lending business we're doing.

Yes, at the end of the day, yes, of course, we make our money by spread income. We want people to take loans from us and put deposits with us. But they shouldn't do that just because we have the best price, they should do it because we've solved a problem for them. And a large part of the deposit success we've had is actually that products we invested in about 3 or 4 years ago. We don't advertise them too loudly for competitive reasons as you can fully appreciate, but that's really what it boils down to. In some ways, that's what fintechs are doing, if you think about it, right? They take a customer problem and they go and solve it. It's a very narrowly defined customer problem, but then they solve it really well, and they are good economic rents for solving that. And we're trying to do the same thing more on the commercial space.

Our next question is coming from the line of Samuel Varga with Stephens Inc.

This is Samuel Varga on for Brody Preston. I wanted to go back just for a moment to loan growth and returning to the residential and consumer portfolio where you had a pretty substantial uptick here. And I understand that $50 million of that is kind of explained out of the $750 million. So I wanted to ask where the additional $700 million of growth came from?

Just our regular jumbo correspondent portfolio.

It's hard to have completely smooth growth.

Yes.

I think if you go quarter-over-quarter, you'll see it up and down a lot. This quarter was high, but I don't think it was that high in the couple of quarters before that.

But that's really that additional growth. I know you see the title residential and other consumer, but the other consumer portion of that is so insignificant that I keep asking people, can I just take that out of the title, and they keep telling me no, because it's in there. It's all residential or almost all residential. And the big chunk of the growth for this quarter was in our jumbo portfolio.

Understood. That's very helpful. And then just turning to yields a little bit. Could you give some additional color on the kind of the delta between the roll-on and the roll-off rates?

So I don't have the roll-off rates in front of me. The roll-on rates in the residential book are running, 2.45% to 2.50% and in the commercial book, a little below 3% right now.

Great. And then on the securities book, what sort of rates are rolling on these days?

For the quarter, it averaged 1.20%.

Awesome. And then I guess my next question would be, if you could just give a sense for the effective duration of that securities book currently?

The configuration of it?

No, no, the duration.

The duration. It's about 1.60%. It's sub-2%. And it's been consistent for a long time, but about 1.60%.

Our next question coming from the line of Steven Alexopoulos with JPMorgan.

Can you guys hear me? Raj, I wanted to ask this question. So other banks are seeing elevated payoffs, too, but they're also seeing stronger commitment growth. It looks like your commitments were up by less than 2% in the quarter and even what you went through with the Delta variant, the impact basically lessening quite a bit in Florida. I would have thought those commitments would have picked up. Do you have any color there?

Which commitment specifically?

Commercial commitments.

I don't think we've actually disclosed that number. Well, I guess that's part of the deck. Yes, yes.

It's in the deck, Leslie.

Yes. That doesn't include the pipeline though, Steven. That's the commitments on the existing book that you're seeing in there.

Right. But as other banks are calling that out, they're seeing 5%-ish growth quarter-over-quarter. I think you guys are 1.5%. And just given Florida's a fairly open economy. Like what are you hearing from your customers? Are they not as optimistic on the prospects for their growth. It's just surprising that you're not seeing stronger commitment growth here?

Yes. I wouldn't necessarily say they're not as optimistic as what they see for the future in terms of the business. Some of that -- it's hard to answer that in a real granular way without sort of having deep insight into what everybody else's book looks like some of it can be mix of business.

Actually, a lot of mix of business. We're not in some of the -- for example, the capital call line business, which you were discussing actually just before this call. We're not a big player in that business. That has been a significant amount of growth. All the private equity discussion that we've had on this call, how active private equity has gone we think about what businesses would actually benefit from private equity growing so much, it would be a capital call line business, which we're not in, in any meaningful way.

So I think it's a mix of business. Our lines tend to be formula-based lines against inventory and receivables, while the inventories are struggling for all the reasons we read about every day in the paper. And shells are not stocked and shells are not going to get stock and receivables aren't going to grow, we are going to lag with that. So I think it has probably got to do with the kind of line business we do versus some of our competitors might be.

Yes. I would probably also add, Steven, that as we think about the sales team that we have and what we're asking them to do the deposit growth, the TM growth and other things are a very center part of what we're asking people to spend a great deal of time on, loan growth, obviously, is a piece of that. But when we look at the attractiveness overall of a potential client. It isn't just a commitment size number that's attractive to us. It's kind of a full banking relationship kind of number. And so we're not as solely focused on commitment as being the predominant driver of where we put sales effort as much as we are that's an important component. But as much as we are -- will this drive NIDDA growth, will we get operating a TM business out of it? And is this a long-term plan for the organization that we find attractive.

Okay. That's good color. I wanted to ask, so residential was strong this quarter on the loan growth side. Are you guys just more opportunistic given C&I coming in a bit light? Or should we expect strong growth in resi to continue?

I -- actually, looking at the pipeline for resi right now. I don't think it will be a repeat of this quarter. I think a few things fell into place. Some of it was actually just things that rolled off from the previous quarter into this quarter. So I think this was an outsized quarter for resi, I don't expect it to be that strong next quarter.

Okay. And then finally, if I could squeeze one more in. Leslie, on the other fee income line, what's putting so much downward pressure on that? I think it's down just under 30% now year-over-year.

Yes. So Steve, that's a kitchen sink line. I guess the best way to describe it. There's just a lot of things in there that could be up or down in any given quarter. I don't think there's anything going on in there that I would call a trend. A couple of the things that happened this quarter, we actually had a negative mark on our commercial servicing rights, which in the overall scheme of things are very immaterial and come out of the SBA portfolio. There was a negative mark on some of our BOLI this quarter. It's just kind of miscellaneous episodic things, none of which I think are indicative of any kind of trend.

Okay. But is this level a decent run rate we should assume?

Actually, no, probably a little higher actually is a better run. I think we've had a couple of negative things that went through there this quarter that I think were kind of not normal.

I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Raj Singh for any closing remarks.

Thank you very much for joining us, and we'll talk to you soon. Thank you. Stay safe, everyone.

Bye, everyone.

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