BankUnited (BKU) Q3 2026 Earnings Call Transcript

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DATE

Wed, Oct 21, 2026

CALL PARTICIPANTS

• Corporate Secretary - Jackie Bravo
• Chairman, President, and Chief Executive Officer - Rajinder Singh
• Chief Financial Officer - James G. Mackey
• Chief Operating Officer - Thomas M. Cornish

TAKEAWAYS

• Net Interest Margin -- 3.16%, representing a 10 basis point increase from the prior quarter and exceeding the previous guidance of 3.15%.
• Adjusted Diluted EPS -- $1.03, excluding a $2.3 million net loss on the sale of investment securities.
• Share Repurchases -- 2.1 million shares, representing a total investment of $97.0 million during the third quarter at an average price of approximately $46.19 per share.
• Non-Interest Demand Deposits -- 32.2% of total deposits, reflecting an increase from 30.1% reported in the third quarter of 2025.
• Average Cost of Deposits -- 1.99%, reflecting a six basis point reduction from the previous quarter and a 39 basis point improvement from a year ago.
• Average Core Loans -- $16.9 billion, representing 4% growth from a year ago driven by commercial real estate and mortgage warehouse lending.
• Mortgage Warehouse Lending -- $864 million in average balances, increasing 18% from the prior quarter and 35% from a year ago.
• Commercial Real Estate Loans -- $7.0 billion in average balances, reflecting 1% growth from the prior quarter and 10% growth from a year ago.
• Criticized and Classified Loans -- $1.0 billion, representing a 14% decrease from a year ago and a 1% decrease from the prior quarter.
• Net Charge-Offs -- 0.11% of average loans, remaining flat compared to the second quarter and decreasing from 0.25% a year ago.
• CET1 Capital Ratio -- 12.1%, compared to 12.3% in the prior quarter and 12.5% a year ago.
• Tangible Book Value per Share -- $39.10, reflecting a decrease from $40.48 in the prior quarter and remaining essentially flat compared to a year ago.
• Q4 Core Loan Guidance -- $17.6 billion to $17.7 billion, reflecting management's expectation for seasonally strong production in the final quarter of the year.
• Q4 Net Interest Margin Guidance -- 3.2%, assuming a 25 basis point interest rate increase by the Federal Reserve in December.
• Q4 Net Interest Income Guidance -- $265 million, driven by anticipated margin expansion and earning asset growth.
• Non-performing Assets Ratio -- 0.77%, including 0.09% related to the guaranteed portion of SBA loans, compared to 0.66% in the prior quarter.
• Provision for Credit Losses -- $9.0 million, reflecting a build in the allowance for credit losses to 93 basis points through the use of qualitative overlays.
• Service Charges on Deposits -- $6.4 million, representing 19.4% growth compared to the third quarter of 2025 due to higher treasury services penetration.
• Loan Production -- $1.1 billion for the quarter, with increases in every major line of business sequentially for every quarter this year.
• NDFI Exposure -- $1.2 billion, representing a reduction from $1.5 billion a year ago as management de-emphasized lending to private credit funds.

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RISKS

• Mackey noted, "while our pipeline of transactions was strong, just the interest rate volatility this quarter frankly just resulted in a lower average revenue per transaction," explaining the $1.8 million decline in capital markets income.
• Singh noted that because the mortgage origination business was "getting impacted pretty severely by rising 10-year rates, our title business took a hit for that," regarding seasonal deposit moderation.

SUMMARY

BankUnited, Inc. (NYSE:BKU) reported third quarter results that included net interest margin expansion and a shift in the funding mix toward non-interest demand deposits. Management stated that while the broader economy remains stable with strong GDP growth and low unemployment, the company is monitoring a changing interest rate environment and increased deposit competition. The bank utilized $97.0 million for share repurchases during the period and indicated a preference for maintaining a neutral interest rate sensitivity profile. Strategic focus remains on growing the middle-market commercial banking segment, which has experienced three consecutive years of double-digit growth.

• CEO Singh noted that the bank’s ability to reduce deposit costs to 1.99% occurred despite intense national competition for promotional money market and certificate of deposit rates.
• The company sold $1.0 billion in lower-yielding, shorter-dated securities to reinvest in instruments with three- to five-year durations to improve portfolio yields and manage asset sensitivity.
• Management reported decreasing exposure to non-bank financial institutions (NDFI), specifically avoiding lending to private credit funds and flashier asset classes like data centers and artificial intelligence.
• The title deposit business saw lower average activity levels that management attributed to rising 10-year Treasury rates impacting the purchase mortgage market.
• Management indicated that the commercial banking segment, which focuses on client tickets of $5 million to $10 million, typically captures full relationships and maintains 100% loan-to-deposit ratios.
• The bank expects to complete its current share repurchase authorization in the fourth quarter and will discuss a new plan with the board of directors in late 2026.

INDUSTRY GLOSSARY

• NIDDA: Non-interest demand deposit accounts, which do not pay interest to the depositor and serve as a low-cost funding source for banks.
• NIM: Net interest margin, a measure of the difference between the interest income earned by a bank and the interest paid to its lenders and depositors.
• NDFI: Non-bank financial institutions, which provide financial services such as lending or private credit without a full banking license.
• CET1: Common Equity Tier 1 capital, a key regulatory measure of a bank's core equity capital compared to its total risk-weighted assets.
• MWL: Mortgage warehouse lending, which involves providing short-term funding for mortgage originators to finance loans until they are sold to the secondary market.
• AOCI: Accumulated other comprehensive income, which includes unrealized gains and losses on certain investments like available-for-sale securities.
• PPNR: Pre-provision net revenue, a measure of bank earnings before taxes and the provision for credit losses are deducted.

Full Conference Call Transcript

Operator: Good day, and welcome to the BankUnited Inc. third quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star and then 2. Please note this event is being recorded. I would now like to turn the conference over to Jackie Bravo, Corporate Secretary. Please go ahead.

Jackie Bravo: Thank you. Good morning, and thank you everyone for joining us today for BankUnited Inc.'s third quarter 2026 results conference call. On the call this morning are Raj Singh, Chairman, President, and CEO; Jim Mackey, Chief Financial Officer; and Tom Cornish, Chief Operating Officer. Before we begin, please note that our remarks today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect current expectations and are subject to various risks and uncertainties that could cause actual results to differ materially. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise.

Additional information regarding these risks can be found in the company's annual report on Form 10-K for the year ended December 31, 2025, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Raj Singh.

Raj Singh: Thank you, Jackie. Good morning, everyone. Thanks for joining us. Usually, we always have this issue that we come out with earnings, and there are 8 other banks doing their calls at the same time. My team tells me that we somehow got lucky, and we picked a day when not many banks are coming out. So we'll have your undivided attention. That's awesome. Let me start by just before we talk about our numbers, just talk about the question that I often get from investors, what do you see in the economy and how are things out there in the mainstream?

My answer is going to be similar to last quarter, which is while there are geopolitical risks and energy is a little out of control, there are concerns around inflation. The economy itself is doing quite well. GDP growth are strong, unemployment is historically low, and in our particular markets, even more so, both those things. We are benefiting from that but keeping an eye on making sure it continues that way. What has changed from the last time that we spoke is the interest rate environment is quite different. Fed is no longer in a hold or loosening monetary policy stance. It has gone the other way.

We have had our first rate hike, but more important than the rate hike also has been what has happened with the rest of the yield curve. That is a big change from last time, and we are paying extra attention to it and make sure that we have all our bases covered. That is really been the big change. Overall, our numbers, I will walk through them really quick, and of course, Tom and Jim will then get into some detail. Net income came in at $72 million or $1.01 per share. I know you guys love to exclude anything on the securities front.

If you take out some securities losses we had, net income was $74 million, and EPS was $1.03 per share. If you compare that to last quarter, I think we were at $0.96 last quarter, and a year ago, we were at $0.94. So making progress. ROA on an adjusted basis was 84 basis points, and ROE is now pretty damn close to 10%, but still not at 10%. It is at 9.8%. Basically, ROA, ROE, margin, EPS, everything improved, and it all happened on the back of basically gaining market share and deepening client relationships. Quickly, the highlight of the quarter was margin. We had given you guidance that by fourth quarter we will be at 315 NIM.

We are happy to be actually at 316 already in the third quarter. A bit of a deja vu moment for me. I think this time last year, we had the same dynamic play out. We had promised you a margin for the fourth quarter, but we achieved that in the third quarter and then expanded from there. It is going to be a very similar story, and we will talk about guidance a little bit, but margin is looking very good. And the reason it is good is because we have been very laser-focused on pricing and profitability and refuse to do business just for volume sake. That is the trade-off we have made, and it is showing.

If you dissect this a little bit deeper, where is the margin growth coming from? Well, it is coming from both sides of the balance sheet. Commercial loan yields are up, but average deposit costs are down. I tend to read not every bank that comes out for the earnings before, but I do selectively pick up earnings releases from other banks. And I have yet to see a bank that has, maybe there is some bank, but I have not seen a bank that has actually reduced deposit costs last quarter as a quarter-over-quarter. We are very proud of that. And by the way, that happened not because our NIDDA grew this quarter.

Actually, our average NIDDA was flat this quarter. This is really all coming off the back of interest-bearing deposits. We are very proud of that. Printing a number below 2%, I think that makes me very happy. Talking about deposits, our franchise continued to perform well. And deposits, you remember, the seasonality in our deposit. Second quarter is always the strongest quarter, and then things tend to moderate in the third and fourth quarter, and first quarter is our weakest quarter. Average NIDDA was essentially flat this quarter. To be honest, I was expecting a little bit of growth.

But in September or late August into September, with the mortgage origination business getting impacted pretty severely by rising 10-year rates, our title business took a hit for that. Now, we grew our title business in terms of customers who brought in more clients this quarter and continue to do that every quarter. But the average activity in those accounts was lower and directly attributable to what's happening in the long end of the curve. NIDDA now stands at 32% of deposits. Again, compared to a year ago, it was 30%, so there's growth. We still have 10% growth in NIDDA year-over-year. I'm talking about averages.

Remember, we've told you time and time again, don't look at period ends, always look at averages. That's what drives the P&L, and that's a better representation of how our business is doing. Quickly talking about lending. Again, we had a pretty decent quarter in terms of production, but payoffs have been high again. Loan production year-over-year, our core loans, which we define as a commercial CRE in small business and mortgage warehouse lending as well, grew at about 4%, about $700 million. But the average C&I balances from last quarter did decline by 300. Some of it is attributable to some loans that slipped over into the fourth quarter.

But generally, it's all coming back to the discipline that we're trying to maintain on two fronts. One is trying to get the full relationship and not just do transactional business, and second is spreads. That's directly attributable to that. Having said that, fourth quarter is always our biggest quarter. If you go back and look at last year or the year before, you'll see fourth quarter tends to be the blowout quarter for us, and we expect the same this year. I will say one more thing about C&I. I've been trying to look at a lot of what our competition is doing.

A lot of C&I growth, especially over the last couple of years for the industry, has come for, but at least greatly benefited from NDFI expansion. We have actually taken a more selective path, and instead of increasing our NDFI exposure, we've been decreasing it. It's a call on risk for no other reason. We think it's the right thing to do long term. We're okay with doing investment-grade capital call business, a little bit of that, but other categories of NDFI, we have been taking down. Also, we have steered clear of some of the flashier asset classes like data centers and AI. We don't think a bank our size really is geared towards participating in that.

And I know some of our peers are actively participating in that growth as well. There's no way we're getting deposits out of that business if we ever did that, put it that way. Quickly, a comment or 2 on credit. Credit is fairly benign, and the charge-offs were pretty low, just like last quarter. Provision would have actually been 0 if we had just gone with the model. But given all the geopolitical and other risks that are out there, we used qualitative overlays and built reserve to about 93 basis points. Capital.

Because the stock was weak this quarter, we took this opportunity to step up our buyback speed, and we bought back a lot more shares this quarter than previous quarters. I think we bought back 2.1 million shares for about $97 million. So year to date, if I combine dividends and share repurchase, I think we've returned $278 million in the first 9 months of capital. And having done that, CET1 still remains robust at 12.1%. And I know your question is going to be, so what happens in the fourth quarter? Well, most likely we will finish whatever is remaining in this authorization, and we'll go back to our board in the fourth quarter.

We have meetings coming up in November, December, and we'll discuss this with them. They'll probably want to see a detailed business plan for next year and revised forecasts for actually not just the next year, but the next 3 years, and they'll make a decision based on that. But I'd be shocked if we don't re-up the buyback. With that, quickly on margin, I've already said this. Expect margin to expand again modestly in the fourth quarter quite like it did last year. And I'm sure you'll all be tempted to ask us about what will happen past fourth quarter, and we're not ready for that yet. We will give you that guidance in January like we always do.

With that, let me turn it over to Tom, and then Tom will turn it over to Jim.

Tom Cornish: Great. Thank you, Raj. So as Raj mentioned, average NIDDA remained essentially stable from the prior quarter despite the normal seasonal activity that we have. So some parts of the businesses, we operate different businesses that have different cycles. Some parts were down, some parts were up across the quarter from an average perspective, but overall up 10% from a year ago. We finished with total NIDDA at 32.2% of total deposits compared with 30.1% a year ago, so we were pleased with that. And average total deposits, excluding broker deposits, increased by approximately $1 billion from a year ago. Commercial operating balances continue to remain strong. Pipeline continues to remain strong.

As Raj mentioned, we're having good success in adding new relationships. So one thing I always talk about is the progress we're making on service charges on deposits. If we look at Q3 2026 compared to Q3 2025, we were up 19.4%, so we're really happy about that. I think it shows good product penetration across the treasury services business, strong operating account business, and strong discipline on the pricing of products and services that we offer through the platform. The quality of the funding base continues to improve as we add more operating accounts and expand relationship banking. Production, as Raj mentioned, we were happy with for the quarter, just slightly over $1.1 billion.

We've had a quarterly increase of production, for each major line of business for each quarter this year, kind of building up to what is our normal very large fourth quarter, which we anticipate, and we've already seen a good level of closing activity early in the quarter so far for this year. Loan balances for the quarter were impacted by some payoffs, some delayed closings, and just ongoing portfolio positioning. Average core loans increased by $706 million or 4% from a year ago. Areas where we saw some growth in the quarter, average CRE loans increased by approximately $75 million from the prior quarter and 10% a year ago.

As you can see from the detailed additional information in the deck, that's very balanced across all major asset categories within CRE. There's no particular imbalance, and the overall CRE portfolio still remains with a 1.8 average debt service coverage ratio and a 54% loan-to-value profile. So we feel very good about that. Average mortgage warehouse balances increased approximately $133 million or 18% from the prior quarter and 35% from a year ago. The growth in CRE and mortgage warehouse partly offset the C&I payoffs and the timing of closings. We continue to remain focused on growing core loans while remaining disciplined around pricing and full relationship economics.

Jim and Raj and I were looking at some numbers this morning, kind of tracing spreads from a year ago to today on a quarter-by-quarter basis. Despite substantial competition in the market, I think we're holding spreads very well and staying really disciplined on that. We continue to see healthy flow of opportunities. As Raj said, we're in great markets. The markets continue to do well. Virtually every market we're in, we're seeing good opportunities in Florida. Florida remains strong. The New York market has been very good to us, particularly over the last year in terms of growth, particularly in the C&I area. Our newer markets like Atlanta and Charlotte and Dallas are really doing well.

We're confident heading into the fourth quarter and looking forward to a very strong quarter. With that, I'll turn it over to Jim.

Jim Mackey: Great. Thanks, Tom. As Raj mentioned, we had adjusted net income of $74 million or $1.03 per share. I won't repeat some of the statistics that Raj mentioned, but I do want to dive just a little bit deeper in some of the numbers. The only adjustment we made was related to security sales. We normally have flat to slight gains on this line item, but this quarter we had a $2.3 million loss. What drove that is, with the market volatility this quarter, it gave us an opportunity to sell some shorter-dated seasoned securities where spreads had come in and tightened, and we were able to reinvest those in longer-dated securities at more attractive yields.

It certainly helps NIM, but more importantly, it complements our slight asset-sensitive balance sheet profile. That's why we wanted to take those actions now. Now, while we only adjusted earnings for the security sales, there were a couple other notable items I just want to call out at the beginning of my comments. Both are down in non-interest income. First is leasing. We had the opportunity to sell some, I'll call it challenging lease assets at attractive prices. We're continuing to sort of de-emphasize that leasing portfolio. So when we have that opportunity, we want to take advantage of it.

We recognize the $1.1 million loss on these transactions, but with residual gains and losses on equipment sales, it's a normal part of the business, and we have it regularly. This was just a little bit larger than usual, so wanted to call it out. On BOLI, we had a $1.9 million decline this quarter. These plans are designed so that the asset and liabilities largely offset over time. But there are quarterly mismatches in periods where rates are volatile. If you look back over the last couple of years, you'll see it bouncing around, and usually when there's a big movement up or down in rates.

We would expect this to normalize pretty quickly over time and start to see the quarterly BOLI performance level out consistent with where you've seen it over time. On net interest income and margin, as Raj mentioned, both have improved this quarter, reflecting our improved funding mix, lower deposit costs, and higher asset yields. NII up $5 million from the last quarter, $11 million from a year ago. NIM up 10 basis points from last quarter, 16 basis points from a year ago. Related to the 10 basis points improvement from last quarter, it's really driven primarily by improved asset yields. Our security yield went up 10 basis points, and that added 4 basis points to NIM.

This reflects the portfolio actions that I mentioned earlier, as well as various purchases that we made earlier in the year. Core loan yield increased 4 basis points, also adding 4 basis points to NIM. That was largely due to the favorable repricing and the improved mix within the loan book. The remaining 2 basis points of improvement is due to funding optimization, where we relied on less wholesale funding during the quarter. As Raj mentioned, deposit costs were 1.99%, down 6 basis points from last quarter. NIM improved year-over-year by 16 basis points, and that was mostly due to improved funding mix. Both sides of the balance sheet saw the impact of lower rates.

However, the funding cost just declined more than enough to offset the decline in earning asset yields. On the non-interest income and expense, non-interest income was $20 million for the quarter, which is down $9 million from last quarter and $6 million from a year ago. As I talked about at the beginning of my comments, the biggest drivers were the, I'll call it, the notable items that happened during the quarter. I will acknowledge capital markets revenue was down $1.8 million from last quarter, and it was flat to the same quarter last year. Really, there were 2 things that drove that decline. One was there were several lending transactions that slipped from third quarter to fourth quarter.

So that creates some noise between the quarters. While our pipeline of transactions was strong, just the interest rate volatility this quarter frankly just resulted in a lower average revenue per transaction. So that weighed on it a little bit. Not much to say on non-interest expense. It was stable at $175 million. You can see it's up from a year ago. That's just inflationary, higher compensation costs, investments we're making in our business, and elevated deposit costs as our NIDDA continues to grow. On credit, just a couple things to say. Our net charge-offs, as Raj mentioned, remain low this quarter. Just want to give a public service announcement that don't just look at one quarter.

Look at this over time. It can bounce around given the nature of our portfolio. Criticized and classified down 14% year-over-year. Non-performing loans are down 30%. Our NPA ratio improved to 77 basis points from 110 basis points. And provision expense at only $9 million really reflecting the low level of charge-offs, but importantly, we increased the coverage 2 basis points. And we did that through the addition of qualitative factors given the low level of charge-offs. Let me finish by turning to our guidance update. Obviously, as we're almost at the end of the year, we focused our guidance just on the fourth quarter. Again, we'll come back to you in January to talk about 2027.

I'll note our fourth quarter guidance assumes one more rate increase in December, 25 basis points. Let me tick down the metrics that we provided. Core loans, we're forecasting at a range of $17.6 billion-$17.7 billion ending balance. That reflects our seasonally strong fourth quarter. We've got a healthy production pipeline. So lots of good opportunities for the growth. The one thing that's always a wildcard you can't predict is timing of payoffs or what utilization rates may be. So that's why we're giving you a range. NIDDA, $8.65 billion. Again, consistent with the seasonal patterns and also keeping in mind what's going on in the mortgage market related to the title business.

NIM, as Raj mentioned, we expect to continue to improve in the fourth quarter. We're pegging that at around 3.2%. The impact from the September Fed increase and the fact that we're slightly asset sensitive certainly will help. Net interest income of $265 million. Just to remind everybody, that's sort of as reported, so a non-FTE basis. I know some model looking at it on FTE basis. And that just reflects the higher NIM and the increase in earning assets during the quarter. Non-interest income, we do expect to return more back to the normalized levels.

We certainly expect to see some improved capital markets revenue in the quarter and a non-repeat from some of the notable items that we discussed. Expenses around $178 million. Just normal quarterly variability. Nothing really to call out there. All that sort of drives the PPNR of $115 million. And lastly, credit provision. It's a little hard to peg, but we put it at $15 million, which is sort of our normal kind of run rate, if you will. And a lot of it'll depend on where charge-offs and other things land during the quarter. With that, I'll turn it back to Raj.

Raj Singh: All right. I think I was just looking through my notes here. One comment that I wanted to make, which I forgot, it's a detailed point, but it's an important one. In our C&I business, you just see a C&I number. There are actually a few businesses that add up to that. There's a large corporate business, which is larger tickets business. There's a middle market or what we call commercial banking, and there is stuff, very small ticket business, which we do out of our branches. The middle one, the commercial banking is what we've been really focused on the last 2 years and has been growing at double digits.

This will be its third year of growing double digits. That is a business that we tend to capture the full relationship. We tend to have 100% loan-to-deposit ratios. The deposits come in, and generally the deposits are the lowest cost of all of our business lines. We are very focused on growing that. It doesn't show up in the numbers and still not going to be big enough to move the needle. I think the whole book is about a couple of billion dollars, split between New York and Florida. But that's what is growing. Where the margin pressure is the biggest and we don't get enough deposits is the large corporate business.

That's the one that actually is a little bit behind in terms of its overall balances. We still want to grow that business too, so don't get me wrong. But I'm really excited about commercial banking, which is that small ticket of $5 million, $10 million ticket size business doing as well as it has. In the next 2, 3 years to come, I expect that business to really become a big enough business to stand on its own as a separate line of business. But we've had a lot of success there. It's taken a long time. We've changed leadership over here. Not changed, but we added to the management bench over there.

We're expanding that into our new markets as well, which we have not done to date, so in Texas and eventually Atlanta as well. We're very excited about that. You'll hear me talk about this more and more over the course of next year or two. Just one point that I wanted to make that I forgot. Let's open it up for Q&A.

Operator: We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. Our first question comes from David Chiaverini with Jefferies. Please go ahead.

David Chiaverini: Hi. Thanks for taking the questions. I guess starting out on the net interest margin. You guided for it to expand further in the fourth quarter. You mentioned about how you're slightly asset sensitive and you're assuming one hike. I guess can you split out how much of the expansion is from the asset sensitivity versus mix shift on the balance sheet?

Jim Mackey: In the fourth quarter, I think it's largely the asset sensitivity. The NIDDA obviously is a seasonal, so it declines. We continue to have non-core loans running off, so on the margins, that is helping. As Raj and Tom mentioned, we're holding the line on loans. So it's really just or loan yields. So it's really just the deposit cost resetting slower than the benefit of the loans repricing up.

David Chiaverini: That's helpful. As we think about the forward curve with a few potential hikes coming in, what sort of magnitude of rate sensitivity should we think about as it relates to the NIM and rate hikes?

Raj Singh: I think there are 2 things here. One is just the lag effect from rate hikes, which I think is really a sharper point to talk about the fourth quarter. Eventually, lag effects only help you for a period of time. After the lags catch up with you, deposits do price back up. Our stated strategy always has been to not be asset sensitive or liability sensitive. We try and manage as close to 0 as possible. That's on a static basis. On a dynamic basis, on new business coming on, naturally we become asset sensitive. Even now, ALCO's going to meet next week as well.

We will try and again rejigger to make sure that we're not because we really don't know where rates are headed. It feels like they're headed up, but they could be headed down within 3 months. We're not trying to make a call on rates. We're trying to be as the static balance sheet to be as neutral as physically possible and just slight asset sensitivity from the new business that's coming on.

Jim Mackey: Yeah. As Raj, our deposit betas, I think, during the last rate hiking cycle was like 80, and we would expect that to be the same, but it's not linear, right? In the earlier cuts, it's much lower. Yeah. So.

David Chiaverini: Very helpful. Thank you.

Operator: The next question comes from Jared Shaw with Barclays. Please go ahead.

Jared Shaw: Hey, good morning.

Raj Singh: Morning.

Jim Mackey: Morning.

Jared Shaw: Looking at the growth expected in core loans, can you just help a little bit with breaking that out between C&I and CRE? Thanks, Raj, for the color on the middle market commercial. How should we think about that fourth quarter growth and how sustainable, I guess, those balances are on the balance sheet?

Jim Mackey: Yeah. I would say if you look at what we've done maybe over the last 12 months. We've had more CRE growth as a percentage of that number. I would expect it to be a little bit less. I think that we will probably have about two-thirds of the growth across the segments that make up C&I, including corporate banking, commercial banking, retail, small business, and about a third of that would likely be in the CRE business. We are seeing a bit more.

It probably won't impact us as much in the fourth quarter, but we are starting to see the consistent movement up in perspective that rates will move up being a little bit more impactful in CRE deals that are coming together now. Not what's in the pipeline, not what's closing in Q4, maybe not what's closing in Q1, but you are starting to see a lot of retrading of deals going on in the market.

I think when we look at the next quarter, and even quarters after that, I am expecting that our growth will probably be more like two-thirds to 70% in the C&I world and a third to 30% in the CRE world, just because of kind of the rebalancing of that.

Jared Shaw: Okay. Thanks. And then on the DDA average balance for fourth quarter, I know that you are not focused on end of period, but how should we think about the movement through the quarter and sort of an exit rate for DDAs coming out of the year, coming out of the quarter?

Jim Mackey: Well, average DDA will decline in the fourth quarter. That is just the normal seasonal trend. Then obviously the ending balance will be down as well, and that will be your exit rate in the next year. I am not sure what else to say on that other than- Yeah. A lot of it will depend on-

Tom Cornish: It's a slight decline in the fourth quarter, not as much as happens in the first quarter. But if you go back and look at fourth quarter decline last year or maybe the last couple of years and average that, it's probably our best guess.

Jim Mackey: Yeah.

Jared Shaw: Yeah. Okay. All right, thanks. Any detail on that securities restructuring in terms of balances sold and yield and balances in what was purchased?

Tom Cornish: No, I wouldn't characterize it as a restructuring necessarily. It was sort of just our normal asset liability. It just is maybe a little bit more concentrated in one quarter.

Jared Shaw: Yeah.

Tom Cornish: I would say, again, we were selling assets that were highly seasoned, so we've been holding them for a while. They're less than a year maturity and reinvested in our normal profile, which is more in the 3 to 5 range. That's what we're doing.

Jim Mackey: It's more driven by ALCO than anything else. Yeah.

Jared Shaw: Okay. 3 to 5 means 3 to five-year duration, right? Not yield.

Jim Mackey: Yeah, exactly.

Tom Cornish: Yeah. I'm sorry, I misspoke. Yes, 3 to five-year duration.

Raj Singh: Yeah. Jared, if you look at our origination now for the last 3 or 4 years, C&I is almost all floating rate. CRE also is largely floating rate. We really have stayed away from the fixed business for now 3, 4 years. As new production comes on, old loans pay off. If you just think about the fixed versus floating that on the left side of the balance sheet, that keeps going more and more in the floating rate side. We have to, every now and then, step up and rebalance. We don't use loans to rebalance, we use securities.

Jared Shaw: Got it. Thank you.

Jim Mackey: No problem.

Operator: The next question comes from David Rochester with Cantor. Please go ahead.

David Rochester: Hey, good morning, guys.

Tom Cornish: Morning.

Jim Mackey: Morning.

David Rochester: I just want to touch on the title business for a minute.

Tom Cornish: Yep.

David Rochester: Looking at deposit balances, you are kind of flattish year-over-year on those, but you have been growing customers quite a bit over the last year. I am just wondering, can you talk about that flat trend? Is that coming solely from higher mortgage rates that you are seeing now that is slowing the purchase market, or is there a measure of competitive pressures in there that is come online that is driving some of that headwind as well? Can you talk about how you think these deposit trends could look going forward in this higher rate environment where elevated mortgage rates become the norm?

Tom Cornish: Yep.

David Rochester: That would be great.

Tom Cornish: I think balances because we saw a sharp decline in the month of September. I am attributing it largely to what happened to the mortgage market and what happened to rates. The competitive pressure is definitely higher this year than last year, and last year was higher than the year before. But that is manifesting itself through pricing more than balances. The pricing has gotten less favorable. That is competitors basically coming in, somebody new coming in, they generally lead with price. We are the incumbent, and we are reacting to that price. But in terms of volume, I think it is more to do with what is happening in the mortgage market.

In terms of picking up clients, we are picking up the same number of clients every quarter, roughly, that we have been for quite some time now.

Jim Mackey: The other thing to add, and again, we will be able to talk more about it in January, but if just looking at the Mortgage Bankers Association projections of purchase mortgage market. Most industry participants are saying purchase mortgage market will be flat next year to this year. It cannot go much lower just mathematically. The purchase mortgage market drives more of our balances than the refi market. Clearly, the refi market has completely dried up right now. Purchase mortgage market, as Raj said, certainly the quick movement in the 10-year and the quick movement in rates sort of stifles things. I think generally the market thinks that it will kind of normalize and be flat year-over-year.

So really, if that plays out, then the big driver for us on trends will be continuing to grow share and generate our fair share of those call it flat year-over-year volumes. Does that make sense?

David Rochester: Yeah, absolutely. In terms of plans to grow that business just organically, are you doing any more hires, making any more hires? From a competitive standpoint, I know historically you competed with I would say smaller, sophisticated banks versus your technology platform, which you had been working on for years and was really a step ahead of the rest. Where are you seeing the competition coming from? Is it coming from larger banks, or are you starting to see some of the mid-size banks coming into it as well? Thanks.

Raj Singh: I think it is a full spectrum. I know for a small sort of sub $5 billion bank that is trying to make a mark in this. I know of a bank in the midcap space, but then I also know the money center bank is trying. Money center and the very large banks when they try, they have all the technology in the world. They can do it, but it cannot get out of their own way to focus on this business. It is not just about technology, David, also it is about processes in the back office that are tailor-made for this business.

Fraud, OFAC, BSA, AML, they all have to be fine-tuned to serve this client base, and large companies find that specialization very hard to achieve. It is not about technology. If they could get those ducks in a row, then they could do so. I'm not worried about them at all because they try and then they go away. Smaller players are more nimble and hungry, and there, I think they just come out with price as the weapon to try and dislodge customers. They haven't been very successful, but they certainly are making the market more competitive.

David Rochester: Yeah. Maybe just one last one on the HOA business. You've definitely grown those deposits. It's a nice sleeve of low cost.

Raj Singh: Yep.

David Rochester: You have some low cost within that. Can you just give an update on progress on growing that business and what you're facing competitively? Thanks.

Raj Singh: Yeah. There are a handful of banks, I would say about 10 or 12, that are doing that as a separate business line, and some of them are much bigger than us, and others are our size. The trick is to focus on the low end of the market and not the really big property management companies. That's our differentiator. That's why I think the profitability of our HOA business is much more different than somebody who's playing at a different scale. If you really want to be at a scale 3, 4, 5, 6 times bigger than us, you have to go to the very large property management companies. And there, the profitability is just very different.

It's a different ballgame. So we've avoided that really upper end of the market and stayed focused on the smaller associations. And it's a much harder way to build business. It takes much longer. It has taken us 4 or 5 years to get here. That's okay. I'd trade speed for profitability.

Jim Mackey: Also, another thing I might add is a lot of the M&A activity is sort of at the upper end of the market. If you're fishing consistently at the upper end of the market versus kind of the client segment that Raj is talking about, you're susceptible to a lot more M&A activity creating volatility in the business for you.

David Rochester: Can you just remind us roughly what the percent of DDA is within both of those sleeves and title and HOA, and if that's changed recently?

Raj Singh: I don't have that in front of me. I'll say title I know it's more than 50%, so it's a majority. HOA, I don't have it in front of me, but it's a fairly large number in HOA as well.

David Rochester: Yeah. Okay. All right. Thanks, guys. Appreciate it.

Raj Singh: I will take the next question.

Operator: The next question comes from Woody Lay with KBW. Please go ahead.

Woody Lay: Hey, good morning, guys.

Jim Mackey: Morning.

Raj Singh: Good morning.

Woody Lay: Maybe just to start on credit. It looked like special mentions were down, but some increase in substandard. I was just wondering if you could give any color on some of those moving pieces.

Raj Singh: It is the usual stuff that happens. One or two loans go back and forth between this. There is nothing that we are losing sleep on. I mean, this does happen. We have always said our portfolio is lumpy, and even just 2 loans moving, migrating from one bucket to other can cause this. Tom, do you have any?

Jim Mackey: Yeah. It is basically what Raj said. There is nothing systemic or correlated in that we look at. If we look at the one number that moved to NPL this quarter from being a criticized loan. It was a company that's in the, I would broadly call it in the weather disaster recovery business. I'll say this tongue in cheek, unfortunately, there's not enough weather disasters going on right now, and their business is soft. We haven't had significant hurricane activity, we haven't had significant hailstorm activity, and unfortunately, that's the business they're in. That business is a little bit softer. That was kind of a highlight loan of the quarter that moved from one category to another.

But beyond that, it's kind of just sort of episodic. That's why I gave the public service announcement, just look at the trends over a few quarters. The general trends year-over-year have been quite positive, and that's probably a more indicative measure of the status of credit.

Woody Lay: Got it. That's helpful. Then maybe a question on deposits. It looks like there was some mix change between the IB demand into time. Could you just walk through some of that, the mix change in the quarter, and kind of what drove that change?

Raj Singh: We look at some of the businesses. Let's say we have a muni business. We of course have some brokered deposits. We have some other price-sensitive deposits. We're always looking at them and quarter-over-quarter, month-over-month, you can find one segment get overheated, another one a little less. Like last quarter, we were telling you that brokered market had gotten ahead of itself, and we had backed off brokered in a big way. This quarter, we felt the other way. Actually, muni was a little ahead of itself, especially in Florida. So we backed off on muni, and brokered actually came in line with what our expectations would have been for brokered. So we found more opportunities there than in muni.

So we're fine-tuning this almost on a weekly basis. This quarter it was a drop in muni, an increase in brokered, and we picked up 5, 8 basis points on similar duration assets. Oh, sorry, liabilities. Beyond that, it wasn't really anything of substance. We're not the highest rate out there. We're still getting pretty good roll forward of our CDs. We're still capturing 80%, 85% of the rates we have. So we monitor it very carefully. Promotional money market rates and promotional CD rates in our market, and I think nationally, have taken off. Deposit competition is pretty intense. We're monitoring that very closely and that was the only notable thing.

Muni versus broker kind of flipped on itself this quarter from last quarter.

Tom Cornish: Yeah, we try to be flexible.

Woody Lay: Got it.

Tom Cornish: On opportunities when there's opportunities for imbalances.

Woody Lay: That's helpful color. Then maybe just last for me on capital. It sounds like we might get some additional detail next quarter. But where we are today, the CET1 is above 12%. I think the start to the year, you all kind of laid out a mid-11% CET1 target. Does that still feel like a good target in the medium term?

Jim Mackey: Yeah, I think so. We feel good about that. At the beginning of the year, I would've said we would progress towards that target a little faster. But as you know, loan growth, we've been pretty diligent on that. So loan growth hasn't been as high as we originally modeled. So we've been buying back the same volume of shares that we projected. It's just the investment in the balance sheet's been a little bit slower. So as we think about the next round of share repurchases, we'll want to be mindful of where the balance sheet's going and all of that as we talk.

Raj Singh: Yeah. Fourth quarter, that number might come down, not just from the remaining buyback, but also from some balance sheet growth. So we'll see where we end the year and then most likely. I can't say anything about the buyback until the board authorizes us, but we'll be discussing that with them very soon.

Jim Mackey: Yeah. Just to remind, in the 11.5 we came up just sort of middle of the pack. We're looking at peer sets and capital ranges, and we don't want to be on the low end or the high end.

Raj Singh: Yeah.

Woody Lay: Yeah. Awesome. Well, thanks for taking my questions.

Raj Singh: Yeah. Thank you.

Operator: The next question comes from David Bishop with Hovde Group. Please go ahead.

David Bishop: Yeah, good morning. Hey, Jim. Following up on the loan origination yields and roll-off. Just curious where you guys were onboarding new maybe commercial loans this quarter in terms of the yields versus some of the roll-off. It sounds like maybe some of the non-relationship loans were rolling off at lower yields. Just curious sort of the spread dynamic there.

Jim Mackey: Yeah. I would say it's different in different segments. But if you kind of average it all together, I would say the C&I compared from a SOFR perspective, I would probably give you an average of about 225 basis points to 240 basis points in range.

David Bishop: Spread.

Jim Mackey: General spread, depending upon what segment you're in.

Raj Singh: CRE is lower.

Jim Mackey: CRE is lower.

Raj Singh: CRE is with that one handle.

Jim Mackey: Yeah. Between 160 basis points to 180 basis points, in that range.

David Bishop: Got it. Then just in terms, as you look at the loan pipeline across your geographic regions there, just curious what markets may be standing out and driving the bulk of that commercial pipeline. Thanks.

Tom Cornish: It's pretty evenly spread across all markets. Florida's been good in basically every major area of the state. We've seen good strength in New York, particularly in the mid-sized business category that Raj has mentioned. The commercial banking segment in New York has been really, really strong, and the new markets all continue to perform well.

David Bishop: Yep.

Tom Cornish: It's pretty broad.

Raj Singh: The production is evenly spread. Payoffs are not, obviously. Payoffs are in the more mature markets where we've been, that's Florida and New York. Not much payoffs in the new market, for obvious reasons.

David Bishop: Got it. Appreciate the color.

Raj Singh: Yep.

Operator: The last question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom: Hey. Morning, everyone.

Raj Singh: Morning.

Tom Cornish: Morning.

Jon Arfstrom: Just, yeah, a couple questions here. Higher rates, does that slow the progress on reducing residential at all? Or what are you expecting in the next several quarters on the residential runoff? Should that stay about the same?

Raj Singh: Yeah, that's a good question. I don't think so, is my quick answer. The reason is if you have a 3.5% mortgage, whether primary mortgage rates are at 7% or 7.5%, I don't think it really impacts CPR that much. I think a lot of this is just now either ARMs that are resetting, which are causing runoff or regular amortization or just people move, people have divorces, people die, stuff happens. It is not active refi that is creating the CPR. The refi market is very sensitive to where rates are, but that's not what's causing a 3.5% mortgage to go away. It's more regular stuff that happens.

We've reduced our resi portfolio very nicely now over the last 3 years. We are coming up to a time where the first step will be to not reduce it, to actually flatline it. There'll be a time, maybe a year or 2 after that, we'll grow it as well. It's not that we want to drive this to 0 like we did the multifamily business in New York many years ago. That's not the goal. The goal is that we were too heavy in this asset class, and we need to bring it down. We've been at it for 3 years. We're doing a lot of work.

The spreads in the business do change from time to time, but that'll dictate how aggressively and when we want to step back in. But if you take a finer point to it, in our portfolio, you have some 30-year fixed, you have some five-year ARMs, seven-year ARMs. There's a big difference between how much I like the 30-year and how much I like the five-year. I hate the 30-year, and I like the five-year. I would like to run that 30-year down for a very long time. We do not want to grow that.

There will be a time, and we will give you guidance on that maybe in 3 months on when we will start to actively engage again on the 5/1 to 7/1 part of the business.

Jon Arfstrom: Yep. Okay. Yeah, that is slide 19. That is helpful on understanding that for what it is worth. The other part of this is the 320 basis points NIM that you are talking about for the fourth quarter. I think that is notable. You promised us that, and it looks like you are going to hit it. Do you feel like that is a sustainable level for you, and if we get some more hikes, can that 320 basis points grow over time?

Raj Singh: I think the dynamics that have been playing are still very much the same. Balance sheet is still changing left and right side. As long as we keep doing that, there is no reason why a margin cannot keep expanding. The only caveat I will give you is that there is a seasonal trend from quarter-over-quarter. Just be careful of that. If you ask me year-over-year, do I expect NIM to keep improving? The answer is yes.

Jon Arfstrom: Okay. All right. Thank you very much.

Operator: And one final question from Michael Rose with Raymond James. Please go ahead.

Michael Rose: Hey, everyone. Thanks for squeezing me in.

Raj Singh: No worries.

Michael Rose: Raj, just one question on the NDFI exposure. I know you have been intentional about bringing it down.

Raj Singh: Yep.

Michael Rose: It's a little over 5% of loans, I think about 7% of commercial loans it says on the deck. For a bank your size, where do you think that should be, and where do you think it will end up over time? Basically asking is more structural runoff coming? Thanks.

Raj Singh: I don't think there's anything more that we feel compelled to do. This was a call we made actually earlier in the year, last quarter. Not third quarter, but second quarter. Unless something changes out there in the NDFI space that we start to see more risk, I don't really expect this to change that much.

Tom Cornish: Yeah. I would add that if you look at the NDFI exposure, there is diversity within that overall number, right? A part of it is the capital call business. That's largely an investment-grade short-term business that we're not concerned about, and we'd be willing to expand that. We have a lot of things that run through the NDFI category, like tax certificate financing, and there's a lot of different industry segments that fall into that category that we feel good about and would grow. The part where we are very light and have been careful on has been essentially the lending to private credit funds. That's anything in the kind of BDC business development corporation type world.

That's where we've been careful, and most of that is what's been sort of the reduction. I think late last year we were at about $1.5 billion. Today we're a little under $1.2 billion. Most of that couple of hundred million dollar reduction has been in that area. That's where we'll continue to be very careful because I think the impact in that industry segment from rising rates and heavy use of leverage as we head into next year is not going to be great. But the overall number, not as significant as that component of the number.

Jim Mackey: Yep.

Michael Rose: Perfect. I appreciate the color. Maybe just one final housekeeping question. Jim, when did the securities repositioning happen in the quarter and what was the yield pickup, maybe what was sold, et cetera? Thanks.

Jim Mackey: It was probably front-loaded. Most of it was at the front end of the quarter, and I do not have the exact. Well, I mean, I know securities as a whole had a 4 basis point NIM impact for the quarter. But again, most of that was from the actions we took earlier in the year, a little bit on this quarter. But I do not have the exact yield pickup that I can give you on this call.

Michael Rose: All right.

Jim Mackey: But again, the yield pickup is going to be going from less than a one-year duration security out to a three- to five-year set of securities, and it was north of $1 billion, less than $2 billion that we are really talking about here in book value.

Michael Rose: Got it. Thanks, guys.

Jim Mackey: Thank you.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Raj Singh for any closing remarks.

Raj Singh: Oh, thank you so much, guys. Thanks for joining us, and I am sure there are more questions that will pop up, and Jim is here. I will probably be on a plane in a short while, but reachable as well. Thanks. We will talk to you again in 90 days, or probably at a conference before that. Bye.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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