BankUnited - Earnings Call - Q3 2025
October 22, 2025
Executive Summary
- EPS of $0.95 beat Wall Street consensus of $0.88, driven by funding mix improvement and lower deposit costs; net interest margin reached 3.00% one quarter ahead of plan. EPS consensus values from S&P Global.*
- Revenue was $264.1M versus consensus $280.2M (miss), reflecting provision dynamics and slightly lower non-interest income; NIM expanded 7 bps QoQ to 3.00%. Revenue consensus values from S&P Global.*
- Deposit costs fell to 2.38% and spot APY to 2.31%; NIDDA was 30% of deposits with expected seasonal decline QoQ but +$990M YoY.
- Management guided Q4 margin “flat-ish” around ~3%, full-year double-digit NIDDA growth, total loans flat YoY with core C&I low-single-digit growth; non-interest expense growth trimmed to ~3% for 2025.
- Potential stock catalysts: EPS beat, early achievement of 3% NIM, continued capital accretion (CET1 12.5%, TBV/share $39.27), and opportunistic buyback approach.
What Went Well and What Went Wrong
-
What Went Well
- Margin reached 3.00% a quarter early, with net interest income up $4M QoQ; “Hitting margin 3% a quarter early…we’re very happy that we’re at 3%”.
- Funding mix improved: average interest-bearing liabilities declined $526M and NIDDA grew $210M QoQ; deposit costs fell 9 bps to 2.38%.
- Capital and book value accreted: CET1 12.5%; TBV/share rose to $39.27 (+8% YoY).
-
What Went Wrong
- Revenue missed consensus despite EPS beat; total non-interest income declined $2.2M QoQ and lease financing continued to wind down. Revenue consensus values from S&P Global.*
- Total loans down $231M QoQ, with residential and select non-core portfolios declining; C&I balances fell $130M due to elevated payoffs.
- Non-accrual loans rose modestly (+$3M QoQ), provision was $11.6M; charge-offs concentrated in one C&I and one office loan.
Transcript
Speaker 4
Good day and thank you for standing by. Welcome to the BankUnited Inc. Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jacqueline Bravo, Corporate Secretary. Ma'am, please go ahead.
Speaker 6
Thank you, Michelle. Good morning, and thank you, everyone, for joining us today for BankUnited Inc.'s Third Quarter 2025 Results Conference Call. On the call this morning are Rajinder Singh, Chairman, President and CEO; Leslie N. Lunak, Chief Financial Officer; Jim Mackey, Incoming Chief Financial Officer; and Tom Cornish, 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, uncertainties, and assumptions, including those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive.
Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2024, 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. Rajinder Singh.
Speaker 3
Thank you, Jacqueline. Welcome, everyone. Thanks for joining us. Third quarter results, pretty solid quarter. I will try not to get into the level of detail that Leslie and Tom will, but just hit the highlights. For the quarter, earnings are up, ROA is up, EPS is up, ROE is up, margin is up, and expenses are very controlled, and credit is flat. If I was to summarize this, this is, you know, as good a quarter, you know, as I could have expected even just a month ago. This is, you know, if there's, oh, by the way, deposits did exactly what we had expected them to do, almost to a T. Loans, CRE was up modestly, mortgage warehouse was up nicely, C&I was down. Unfortunately, not because of production, but of the ongoing payoffs that we've been seeing.
Hitting margin 3% a quarter early, I think that's sort of the highlight. We're very happy about that. We kind of hinted on that. Even on our last call, we were running further ahead. We've been running further ahead all year. We're very happy that we're at 3%. By no means is 3% the destination. This was just a way stop. We want to get further, and we will get further, and we'll give you more guidance in January of where margin can get to in the short term. ROA of 82 basis points is an improvement over last quarter and certainly a big improvement over last year. ROE of 9.5%, EPS of $0.95. I think, I checked a couple of days ago, the consensus was $0.88, so happy to beat that. Capital continues to grow.
CET1 is now at 12.5%, and tangible book value per share is up to $39.27. I think total book value per share is now over $40. The buyback is in place, though we didn't really hit much of it in, or any of it in, in the third quarter. We're being more opportunistic with the buyback. Rather than in the past, our buyback strategy has been buy a little bit every day. This time around, we have a different strategy because of the amount of volatility we see in the marketplace. We think it's better to be more opportunistic and lean in hard when there is the opportunity to do so. You will see that play out over the course of the next few months. What else am I missing? Like I said, with credit, everything was about as flat.
Criticized, classified, NPLs, our ACL, our charge-offs, everything was like, when I first looked at the numbers, I thought maybe it was a typo, but it's not. Everything has been just very, very flat this quarter. We have put in some new disclosures around NDFI, which Leslie and Tom will walk you through because those are the kind of questions we're expecting. There also is not much sensational news, either. With that, I'll turn it over to Tom, and then Tom will turn it over to Leslie.
Speaker 2
Great. Thank you, Raj. Before I dive into a little bit of details about the quarter, just a couple of comments from an environment perspective that we're operating in right now and what we kind of see as we look forward into this coming quarter and the start of next year. Raj and I have done a number of events with major clients over the last few weeks. We've visited almost all of our offices, including the new office locations that we've been announcing. We've seen a fair amount of hiring, that's really good quality hiring that we're starting to see a really good build in those areas. We have traditionally been an early-of-the-year deposit grower and an end-of-the-year asset grower on the loan side. I would expect that we would see that based upon what we're looking at right now.
We've got very, very good pipelines in the commercial teams across the bank. We've got very good pipelines in the real estate team, and real estate's been a good growth area for us all year long. Deposit pipelines look strong from an operating account perspective in the fourth quarter. I think when we track business sentiment of clients, both on the commercial side and on the CRE side, businesses are feeling pretty optimistic right now. We had a lengthy session with a group of CRE clients the other night, probably over 100 clients. I think the optimism in the CRE markets heading into the end of this year and next year is very strong. We're quite optimistic about what we expect to see in the near-term environment. A little bit more detail on the quarter. As Raj said, total deposits are basically flat for the quarter, declining by $28 million.
We did experience the normal seasonal fluctuations that we always see in the title business at this point in the year, and to a lesser extent, HOA and government banking. The municipal quarter is generally an outgo during the third quarter. Overall, we're pleased with $1.2 billion in non-broker deposit growth that we've had over the last 12 months. We expect to see seasonality continue in the fourth quarter, but broadly across the bank, the level of market penetration, new relationships, net new relationships in each of our operating segments and geographies is really very strong and very encouraging. On the loan side, as Raj mentioned, of course, CRE and C&I loan portfolio declined by $69 million for the quarter, CRE being up $61 million, while the C&I segment declined by $130 million for the quarter.
We still see payoffs larger than we have historically seen, but we also see those kind of coming to a close as it relates to relationships that we may have decided to exit. We are seeing a little less utilization than we've traditionally seen on the book. I think part of that is because we are continuing to focus on relationships that tend to be more deposit-rich. That's one of the reasons. We're seeing a slight dip in utilization, but nothing that I don't think new business opportunities and production can outrun as we move forward. Mortgage warehouse grew by $83 million in the quarter, which was a good quarter. The RESI franchise equipment and the municipal finance were down, in line with what we have guided to in the past and what we expect. Overall, loan-to-deposit ratio finished at 82.8% for the end of the quarter.
Raj mentioned NDFI, so there's been a lot of talk about that recently. We added some information on slide 16 in the supplemental deck about our NDFI exposure. In total, we have $1.3 billion in NDFI exposure as of 9/30/2025, which excludes mortgage warehouse lines. That's about 5% of our total loan portfolio. The largest components are B2B credit and subscription lines, or subscription line, outstandings as you look at the exhibit are almost all predominantly investment-grade, very high-risk-rated from a quality perspective portfolio. Our B2B portfolio is predominantly secured lending facilities that we have to real estate investment funds. We're not really in the kinds of larger lending to private credit that people are reading about and talking about. Our facilities are more moderate in size and generally secured by the pledges of assets and real estate collateral that we have.
Substantially all of the NDFI portfolio was rated pass as of September 30. Only one loan was on non-approval for $26 million to a real estate investment fund. Brief comments on CRE exposure. Our CRE exposure totaled $6.5 billion for 28% of loans and 185% of risk-based capital. Pretty consistent with the prior quarter. I think if you look at page 11 of the supplemental deck, you can see we've got a well-balanced portfolio. It's kind of interesting. It's almost $1.5 billion in every major asset class from retail to industrial to office, including medical office, and to multifamily when you include the construction portfolio, which is predominantly multifamily. Very balanced overall real estate portfolio, consistent with last quarter at September 30. The weighted average loan-to-value of the CRE portfolio was 55%. Weighted average debt service coverage was 1.77.
49% of the portfolio was in Florida, 22% in the New York tri-state area. These numbers are becoming a little less concentrated in those two as we do more real estate in the Atlanta market, the Southeast market, and the Texas market over a period of time. Office exposure was down $122 million, or 7% from the prior quarter, and criticized classified CRE loans declined by $41 million in the third quarter, primarily as a result of payoffs and paydowns. We are seeing a more normalized refinancing market in the office market. I think everybody has seen positive comments about most of the office markets that we're in, particularly the New York market. In the recent months, the CMBS market has picked up, and there are more players involved in looking at new offices. That's part of the reason why the portfolio continues to trend down.
We're seeing a little bit more of a normalized refinancing market out there. Pages 11 through 14 of the deck have more details on the CRE portfolio, including the office segment. With that, I think I'll turn it over to Leslie.
Speaker 1
Thanks, Tom. Just one quick point. That $41 million decline was specifically CRE office, not CRE overall in criticized and classified. To reiterate, net income for the quarter was $71.9 million or $0.95 per share. Net interest income was up $4 million. As Raj said, we're very happy to report that the NIM was up 7 basis points to 3%. We hit that target that we had put out there for you a quarter sooner than we thought we would at the beginning of the year. To reiterate what we've been saying for a while now, margin expansion has been and will continue to be primarily driven by a change in mix on both sides of the balance sheet rather than by the Fed's actions with respect to rates. Continued execution on this has continued to remain our priority, and the static balance sheet remains modestly asset-sensitive.
We've done some hedging to protect the margin if rates should decline more than the forward curves would suggest. There will be details about those in the upcoming 10-Q filing. This quarter margin expansion was mostly attributable to an improved funding mix. Average NIDDA grew by $210 million, and average interest-bearing liabilities declined by $526 million. On average, higher-cost broker deposits were a smaller part of the funding mix this quarter. We did redeem the $400 million of outstanding senior debt in August. That improved the funding mix from a cost perspective. The yield on that was 5.12%, so that was helpful also. The average cost of interest-bearing liabilities declined to 3.52% from 3.57%, and the average cost of deposits declined by 9 basis points to 2.38%. The average cost of interest-bearing deposits was down 8 basis points to 3.40%.
On a spot basis, the APY of deposits continued to trend down to 2.31%. With the rate cuts that we expect in the fourth quarter, that trend should continue. The average rate paid on FHLB advances did increase, and that was mainly due to the continued expiration of cash flow hedges. There will be details on all of that in the Q. The average yield on interest-earning assets was flat at 5.38% this quarter, while the yield on loans decreased marginally. The yield on securities was up a little bit to offset that. All of our guidance assumes two additional rate cuts in 2025, one in October and a 75% chance of another in December. On the provision and reserve, the provision this quarter was $11.6 million. The ACL to loans ratio was 93 basis points, consistent with the prior quarter end.
I would refer you to slide 17 of the deck for a waterfall chart that talks about the changes in the ACL for the quarter. A couple of things that were driving the movement in the ACL and provision for the quarter, we had improvement in the economic forecast, largely offsetting an increase in specific reserves. The majority of that increase in specific reserves was related to one C&I credit and to a lesser extent, one office loan. That C&I credit appears to be idiosyncratic in nature. It doesn't seem to be any kind of common thread with respect to industry or geography emerging there. We also had increases in certain qualitative overlays, and obviously, net charge-offs reduced the reserve. Net charge-offs totaled $14.7 million.
The net charge-off rate was 26 basis points for the nine months ended September 30, 2023, and 27 basis points for the trailing 12 months, so pretty consistent. Those net charge-offs primarily related to those same two loans, the one C&I loan and the one office loan. The commercial ACL ratio was pretty consistent with last quarter at 1.35%, and the reserve remains a little more than double historical net charge-offs over the weighted average life of the portfolio. As Raj mentioned, NPLs were essentially flat quarter over quarter, up $3 million. Of $136 million in total CRE non-approvals, $119 million is office, and the other $17 million is New York rent-regulated multifamily. NPA ratio was pretty flat quarter over quarter, 99 basis points this quarter compared to 98 last, excluding guaranteed SBA loans. Nothing of note to point out in non-interest income or expense this quarter.
I will point out, however, that year-over-year non-interest income for all categories combined, other than lease financing, which we know is running down as expected, is up 24% as some of our commercial fee businesses start to gain traction. I think that's very noticeable. We've been pointing that out, and I think that 24% increase is worth noting.
Speaker 3
That's early earnings for us.
Speaker 1
Yes, very much so. Yeah, and non-interest expense remains well controlled. A couple of comments on guidance for the fourth quarter. We expect margin for the fourth quarter to be flat-ish, essentially flat. Double-digit NIDDA growth for the year is what we have guided to. We're at 13% year to date. While we do expect some headwinds to that in the fourth quarter, I think we'll easily hit that double-digit guidance that we gave you for the full year. Total loans likely flat year over year. Core C&I, we expect year over year to end with low single-digit growth, which echoes Tom's comments that we do expect pretty strong core commercial loan growth in the fourth quarter. Because of some opportunistic purchasing activity, I think the securities portfolio will be down in Q4 but still up slightly year over year.
Non-interest expense, we had guided to being up mid-single digits for the year. I think we'll do a little bit better than that, probably closer to the 3% area. Those remain well controlled. With that, I will turn it over to Raj for any closing comments.
Speaker 3
No, listen, I'll close with where I started, and I'll just add one thing to it, which you just alluded to, which is 20% growth in core fee income is something we're very happy about and celebrating. It's not a destination. This is just maybe the first or the second inning of what we want to do with it in that category. We're very optimistic about long-term prospects for fee income. Like I said, I'll end where we started: strong EPS growth. ROA, ROE got better. Margin got to 3% a little earlier than we thought. The balance sheet, for the most part, behaved like we had expected it to, and credit remains pretty stable. Capital continued to accrue. The other thing I would like to say is this is Leslie N. Lunak's last earnings call. I talked to her yesterday. I wanted to make sure she wouldn't tear up.
Speaker 1
I am a little bit.
Speaker 3
She has been my partner as CFO for 13 years.
Speaker 1
Yeah.
Speaker 3
Thirteen years. They've gone by very fast. I just want to thank her for her partnership, helping me build what we have, not just this strong finance department, but a strong company. The transition to Jim is going very well. It's been a couple of months. Over the next couple of weeks, we will see the transition actually officially happen. Leslie will be with us through the end of the year, and will be a friend of the company forever.
Speaker 1
Yeah.
Speaker 3
I'll probably still reach out to her for advice into next year, wherever she is traveling.
Speaker 1
Good luck finding me.
Speaker 3
Thank you. Thank you for everything you've done for the company and for me specifically.
Speaker 1
Thanks, Raj. One thing I would add to that, seriously, and I mean this very sincerely, one of my favorite parts of this job has been interacting with and working with and getting to know all of you in the analyst and investor community. I really have enjoyed that. I've enjoyed working with each and every one of you. That's one of the parts of this job that I'm going to miss the most.
Speaker 3
With that, let's turn it over for Q&A.
Speaker 4
Thank you. As a reminder, to ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Benjamin Tyson Gerlinger with Citigroup Inc. Your line is open. Please go ahead.
Hi, good morning.
Speaker 1
Morning.
Good morning.
Thanks again, Leslie, for all the help and really dumbing things down for me. I appreciate that. I'm not to start on credit, but I'm going to start on credit. When you think about the one C&I and CRE, you have a specific reserve, and you're also charging off. The reserve was the build was bigger than the charge-off. Is it fair to anticipate a potential charge-off in 4Q or another one down the road as we wait for those two loans?
Yeah. I think with the one, C&I credit, yes, there will be an additional set few million dollars charge-off in Q4, related to that loan, but it's been fully reserved for. With the other one, the office loan, the charge-off has already been taken.
Got it. Okay. As we kind of finish out the year, I know you gave some preliminary guidance. When you just think about the loan opportunity, when you think, are clients becoming more comfortable with the environment we're working in? Are you seeing increased traction in Atlanta? I know the Charlotte one is fairly new, but just kind of think longer term, is the opportunity set getting better over? I mean, you're arguably the most competitive area in the United States. I'm just trying to think, is it risk-adjusted spread that's not meeting the hurdles? Why are loans so kind of stuck? I get there's payoffs, but what can we expect over the road? I.
Speaker 3
I'll have Tom answer this, but I just want to start by saying, with now being in markets outside of Florida, the opportunity set is actually bigger. Yes, these are competitive markets, but they're also healthy, growing markets, right? That's the trade-off. You want to be in good markets, but good markets are also competitive markets. You know we've chosen these markets intentionally, and we'd rather be in growing markets that are healthy, that are competitive than the opposite. I'll let Tom speak specifically where we're seeing the opportunities. We are being very disciplined about pricing, right? Because we have one eye on margin and the other on volume. It is, you have to, and of course, credit is always front and center. You have to balance all those three things. I would still say that the miss that we've had specifically in C&I is not about missing on production.
It has been mostly because of a large amount of runoff, some of it that we don't control, but some that we do control, which is pricing and credit, and letting those things run out prudently. Tom, you just add some more color to it, please.
Speaker 2
Yeah. I would say, when you talk about opportunity in markets, Raj has asked me to find great markets that are not competitive, and I've not been able to do that yet. Every great market we're in is pretty competitive. I think, if you look at the pricing piece of it for a second, we have held, there is a lot of price compression, and there is a lot of price competition. When we look at pricing through the end of the third quarter, I was actually very happy with where we held spreads at the end of the third quarter. We had some key segments that actually had a couple of basis points of spread increase for the quarter. That might not seem too exciting, but this is a game of inches.
In keeping spreads at the level that we're keeping them is a big part of making the overall margin numbers we're looking at. I think the environment is very good. I am always heavily impacted by ensuring that we're hitting overall production numbers because I believe as long as we're hitting overall production numbers, we will see growth over the long run. We're also growing core relationships, which are really, really critical to the bank. I think new markets, we've invested a lot in new markets, and we're investing even in markets that were maybe older markets that we were a bit underinvested in, like Tampa in the past. We're investing in new producers in these markets. I'm very optimistic about what we're going to see. The environment's good.
Business owners and executives are optimistic about what they see in the economy, and they're optimistic about what they see in companies. To some extent, this is a very complicated answer, but to some extent, mix plays a big role in what we've seen in loan growth, particularly on the upper end of the C&I market, more towards the corporate banking market. In terms of a lot of times, you're in deals, and you're approving deals that have delayed term funding in it. They have acquisition components in it. Your production on some of these kinds of opportunities doesn't immediately turn in the funding. It almost looks like a construction loan in many ways.
I feel very good about what we're looking at in the very near term and into next year in terms of business environment, where clients are, where we're positioned in the market, and actually how we're doing from a spread perspective and a competitive perspective in the market. I feel very, very enthused about where we are.
Speaker 1
I will reiterate on a little bit shorter-term focus. Q4 has traditionally and historically been a stronger loan production quarter for us. With respect to next quarter in particular, that's another factor that comes into play.
Speaker 2
We're a big Q4 player.
Gotcha. Thank you again.
Speaker 4
Thank you. One moment for our next question. Our next question comes from the line of Dave Rochester with Cantry. Your line is open. Please go ahead.
Hey, good morning, guys. Leslie, I know I've already told you this before, but it's been a real pleasure over the years working with you. You've been extremely helpful. Good luck in retirement. Jim, looking forward to picking it up with you.
Speaker 1
Thanks, David, as well.
Yeah, absolutely. On expenses for next year, I know you may still be working on those at this point, but is there any reason for expense growth to accelerate next year, just given everything you want to do in the new markets or upgrading systems, anything like that? Is there anything big that's coming that people should be aware of? Thanks.
I mean, Dave, we're not prepared to give any 2026 guidance on this call. You'll hear all that from Jim in January. We've talked about some investments in teams and platforms and whatnot, but it's not like any giant rip everything out and replace kind of investment that we're looking at. We'll give more specific guidance on the January call.
That sounds good. I figured I'd try one last time.
Yeah, Roger's wearing it.
On deposits, if you could give an update on the title business on some of the trends this quarter, just from a customer growth perspective. I know you gave the balance of title, which is great, but it'd be great to hear just what the customer acquisition was this quarter. I know you typically grow around 40 customers plus or minus. How many customers do you have at this point, and what's your outlook there?
Speaker 3
Very similar to the run rate that we've seen over the last many quarters. I don't have the exact number in front of me, but I also am looking at, you know, I've gotten an update on the pipeline for the next couple of quarters, and very strong. The title business is doing just great, and, you know, it's total customers. We have about 10% market share, if not more, of the entire industry already. I'll leave it at that. That's the best we can tell because nobody publishes it with perfect accuracy. This business is growing. It's growing at the same speed as it has over the last two, three years. I don't expect anything to slow down, slow us down. Someday, hopefully, the mortgage market will come back and that'll help us.
Speaker 1
Not counting on it.
Speaker 3
We're not counting on it. When that happens, it happens.
It'll be nice. Maybe just one last one on capital. You know, at this point, trading below tangible book, it's about a 6% discount right now. It seems like a great time to sort of lean into that. Your capital levels are very strong. I just wanted to get your thoughts there.
Yeah. Like I said in my comments, we are being opportunistic with the buyback because there's been a lot of volatility in the marketplace. The 10b5-1 plan we have out there is designed to take advantage of that volatility.
Sounds great. Thanks, guys. Thanks again, Leslie.
Speaker 1
Yep.
Speaker 4
Thank you. One moment for our next question. Our next question will come from the line of Wood Neblett Lay with Keefe Bruyette & Woods Inc. Your line is open. Please go ahead.
Hey, good morning, guys.
Speaker 1
Morning.
I wanted to start on fee income. I appreciate you highlighting the core growth trends because it does get masked a little bit just with lease financing coming down. That growth rate is pretty impressive. I know a lot of it gets lumped into the other non-interest income buckets. I was just curious if you could break down some of those initiatives. Given we're in the early earnings, what are some, what's the growth potential of those businesses?
Speaker 3
Yeah. I'll tell you what is in that, like the big buckets, without breaking it out like dollars and cents, but the things that are in there, it's lending fees, syndication fees, capital markets, interest rate derivatives business, capital markets, FX business, which is very new and very small so far, but could be much bigger.
Speaker 1
FX business.
Speaker 3
There's capital, commercial card, purchasing card businesses in there. All of that.
Speaker 1
FX more broadly than just the derivatives?
Speaker 3
Yeah. Exactly. The FX, the spot business as well. All of those are investments that were made over the last three, four years, some as recently as just 12 months ago, some about four or five years ago. They're all at different levels of their, I'd say they're all in early earnings. The question is, what is in first earning and what is in second earning? There's a lot of room to grow, and, you know, probably the most exciting part of the bank right now, growing that. The lease financing business absolutely is something which is being wound down, as you can see, quarter over quarter, those numbers are coming down. The deposit business, the deposit service charges, that's more related to DDA.
Some of the benefits of growing DDA get picked up at margin, some in that fee income, but that's also growing at a healthy clip, not at 24%, but it's also growing. Overall fee income should grow very nicely, especially once that lease finance drag is behind us, which we're getting close to. We're excited about this contributing to profitability in a meaningful way very soon.
Speaker 1
Yeah. I would say all of those buckets that Raj mentioned are complementary to our core commercial lending and deposit businesses. I think that's important.
Speaker 3
There is no gain on sale type of stuff in there. We don't have a mortgage origination business that can go up and down on a moment's notice. It's all related to a core commercial business. You're making a loan, you sell a swap. You're moving money around internationally, you sell an FX product. You know, a purchasing card, it's an annuity. Once you sell it, it's a recurring income item. We focus on trying to build stuff that is recurring and it's closely tied to our core business. We didn't just go out there and say, "Let's start something totally different just to generate fee income." We don't have wealth management. We don't have some funky servicing income in here. It's very, very core to what we are doing with our clients.
Speaker 1
I do think the derivatives business, the FX business, the card business, the syndications business, all of those have tremendous growth potential.
Speaker 2
Yeah, I would add that, you know, if you look two years ago, we have invested a lot in syndications capability. If you look two years ago, we were normally either in a bilateral deal where we were the only bank, or we may have been in a deal led by somebody else. Today, we are leading more and more deals on both the CRE side and the corporate side, and that's what's driving the syndication revenue.
Speaker 1
FX is brand, brand new. It's a baby business, and you know, not even making today a pretty insignificant contribution. That's one of the areas where we see the biggest growth potential in the markets we're in.
Speaker 2
Yeah, we're in high international business markets where you have a lot of international trade. I think this gives us the opportunity to focus on when you're in places like Miami and New York and Atlanta and Dallas, you're in big international trade markets. Having this capability allows us to not just take advantage of sort of daily transactions, but to focus on this kind of a client base that will drive that revenue.
Speaker 1
Business we can win that we couldn't have won when we didn't have the capability as well. Like I said, Jim will now be looking forward to the day when those numbers are all big enough that we have to break them out on the P&L, because right now they're still new and they're a bit lumpy.
Right. That's really great color. I appreciate it. Obviously, there's a bunch of sub-verticals there, but if I kind of just track, you know, compensation from a year ago, it feels like the fee income growth is, you know, growing a lot faster than the expense side. Yeah. How do you expect sort of like, the efficiency ratio impact of those businesses? It feels like it should drive improvements.
I think you have to drive improvements. 100%. I think all of those businesses are very efficient from that, you know, from a cost-revenue relationship perspective, without question. I do expect, you know, operating leverage to continue.
All right. That's great to hear. I appreciate the updated disclosures on the NDFI lending book. I was just interested on sort of how that portfolio has grown over the past several years. Has it been pretty stable or has it, just any note on the growth trends over the years in that specific portfolio?
Speaker 2
Yeah, I'd say there's been modest growth in it.
Speaker 1
Yeah, I don't have all the numbers in front of me, but I would agree with that.
Speaker 2
There are certain segments that have grown more. There are certain segments that have grown less when we look at that. We have grown more in B2B credit and sort of real estate underlying businesses, and we've reduced substantially the portion of it that was consumer lending related over the last couple of years as we had more concerns about what was happening at the consumer level in some of those. The overall bucket has grown modestly, but there's been some shifts within those buckets to reflect portfolio strategy.
Got it. All right. Thanks for taking my questions and congrats, Leslie, on the upcoming retirement. Really appreciate all the help you've given me and my seat.
Speaker 1
Thanks, Woody.
Speaker 4
Thank you. One moment for our next question. Our next question is going to come from the line of Jared David Wesley Shaw with Barclays Bank PLC. Your line is open. Please go ahead.
Hey, good morning, everybody, and congratulations also, Leslie. I guess, maybe on the CRE side, where's your appetite for incremental CRE here? Multifamily balances were down quarter over quarter. The office was down quarter over quarter. Where do you see sort of opportunity within those subsectors?
Speaker 2
I would say it's in three areas. I think the retail market has been very strong, particularly the grocery-anchored urban market in every market that we're in. We've seen good growth in that asset segment over the last 18 months, 24 months. We continue to feel good about the industrial segment, which has had good growth over the last few years. Industrial is performing well in virtually every market that we're in, and even in the Northeast as well. In places like New Jersey, the industrial market is very good. Multifamily has shifted a bit because we have a little bit less in stabilized lending and a little bit more in construction. When you look at the construction line, that's virtually all multifamily.
Most stabilized loans are now moving to permanent markets, but we still see in all the markets that we're in, for the most part, particularly in the South, you're still seeing good population migration. You're seeing good development of new multifamily. When you look at the big-picture data around the cost of owning versus the cost of renting, in most of the markets we're in, we still see a very big differential in cost of owning versus cost of renting for homeowners. We see continued growth in multifamily in virtually all of the markets that we're in. Those would be the three primary points of emphasis that we would have. We will still be open to a little bit of medical office, but I would say the big three will be retail, industrial, and multifamily.
Speaker 1
Yeah. Jared, I think the decline in multifamily this quarter wasn't anything intentional or by design. It's just the way the chips fell for the quarter.
Okay. All right. Great. On the non-performers in office, I know it's relatively small numbers overall, but what drove sort of the incremental weakness to cause that uptick in non-performers? Was it more vacancy or rate?
I don't even know if I'd really call it an incremental weakness, Jared. I think it was just episodic as these things work their way through the resolution process. I don't think it was a trend or, you know, if anything, looking forward over the medium term, I would expect it to trend down as opposed to up. I wouldn't make that comment necessarily for any one quarter specifically. I don't think it was a trend or incremental weakness. I think it was just the kind of episodic things that are going to happen as we work through that portfolio.
Speaker 2
Yeah. There's a small batch of loans. If you look at the overall portfolio and look at the average debt service coverage ratio, obviously, the overall portfolio is performing pretty well to be over 1.5. There are a handful of assets that can move up or down, and there are situations where you lose a tenant in any one building, and now you're in an abatement period. Even if you bring in a new asset, things can shift up and down. Overall, when we look at the whole portfolio, which I'm staring at the printout right now, the general trends in most markets are improving each quarter as abatements run off. That's the big driver, is abatement runoff.
Speaker 1
I would say the one we took the charge-off on this quarter, you know, Jared, that's one that's been sitting in workout for a long time, and it finally just reached its final resolution. That's what was going on with that one.
Okay. Thanks. Finally, going back to the capital discussion, we've seen a steady increase in capital, CET1 and TCE. I guess if we're assuming that the buyback is more limited and opportunistic, any other uses of capital we should be thinking of, whether that's an accelerated increase in dividends or a special dividend or M&A, and what would be the upper end of capital where you would start to be more interested in the buyback versus opportunistic?
Speaker 3
Yeah. I don't think my answer is going to be very exciting. It's going to be the same that I've given in the past, which is, yeah, you know, growing dividend is a priority for us. That usually, we do early in the year, so stay tuned for that. Special dividends are not on the table. We have gotten feedback from investors that has been very clear that don't do special dividends. Buyback is certainly something that is one of the tools that people use, though opportunistically. M&A has never really been a lever for us, as is demonstrated by our history of building the bank organically. My number one priority would be to grow, right? Organic growth.
Speaker 1
100%.
Speaker 3
If it is not that, then, you know, buybacks and dividends, but not special ones, just regular ones. Those will be the way to deploy it.
Speaker 1
The only other thing I would add to that, Jared, I know we're being a little maybe vague, but we're right in the thick right now of our annual business and capital planning process. Yeah, probably maybe a little bit more to say about this on the January call when we give you guidance for 2026.
Speaker 3
Yeah. Yeah.
Okay, thank you. Appreciate it.
Speaker 4
Thank you. One moment for our next question. Our next question comes from the line of Timur Felixovich Braziler with Wells Fargo Securities LLC. Your line is open. Please go ahead.
Hi. Good morning.
Good morning.
Speaker 2
Morning.
Looking at, you know, margin over 3%, return on equity, if you round up, you're at that 10% level. I know you'll give us more detail as to the margin trajectory on the January call, but, you know, for the 10% return on equity, benefited a little bit this quarter, maybe from a lower provision, but is that pretty sustainable here going forward? Are we kind of at that level where we're going to continue grinding that higher, or is there still going to be potentially some kind of back and forth with either provision expense or PP&R or whatever else?
Speaker 3
I expect it to grow.
Speaker 1
Yeah. 100%.
Speaker 3
I expect margin to grow. I expect ROA to grow, and I expect ROE to grow.
Speaker 1
Yep.
Speaker 3
Absolutely.
Speaker 1
I would say with respect to provision, I don't think it was abnormally low this quarter. Because we have largely a commercial lending base and things can be episodic, you can see some volatility quarter over quarter. I don't know that I would characterize this quarter's provision overall as being abnormally low in terms of the range of what one could expect.
Okay. Got it. That's good color. A couple on credit. The $26 million NDFI loan that was called out for the Real Estate Investment Fund. Can you just give us some more detail there? What's driving that NPL status?
The underlying assets are office.
The underlying what?
At real estate assets or office.
That's why the underlying.
That's the answer. That's the only one we have with an office concentration.
Okay. The bucket that's B2C, I guess how big is that bucket? In terms of underlying collateral there, is there any exposure to the subprime consumer? Maybe just talk me through kind of what's in that bucket more broadly.
Speaker 2
Yeah, if you look at the B2C.
Speaker 1
Which is in the other in that chart.
Speaker 2
Yeah, that portfolio is relatively small.
Okay, and then maybe.
It has been substantially reduced over the last few years.
In terms of borrower type, is there any kind of distribution either by FICO or collateral type?
Speaker 1
It's literally a handful of loans.
Okay.
Speaker 3
Yeah. We've been negative on the consumer lending space for a couple of years. We've been working that portfolio down, which is why it's not even making the chart. In that other, there are a lot of different categories, but.
Speaker 1
All of which are relatively tiny.
Speaker 3
All of which are tiny. If we had done this chart two years ago or three years ago, that would have been bigger and would have stood out here. Now it's a rounding error.
Speaker 2
Yeah, we say handful. It's only one handful.
Got it. Okay. How about on the commercial side? Commercial delinquencies ticked up across the board. You had the charge and reserve for one C&I credit, but allowance looks like it's down kind of a couple of quarters in a row in the C&I book. Can you just maybe talk through, is that an indication that maybe we're getting through some of the more kind of ringed-in credits and the outlook is improving indicative of the reserves, or is there maybe a chance where commercial allowance has to catch up on the back end of the year just given some of the moving of delinquencies?
Speaker 1
I really, you know, I'm pulling up this slide now, but I think the commercial reserve overall was pretty consistent quarter over quarter. The slight downtick in C&I was really because of the charge-off that we took for the one loan. I don't think really there's anything changing at a high level about how we think about the reserve for that portfolio. I think the delinquencies are exactly what you said. They're just, you know, the normal ins and outs. I did actually ask for a list of them. It's a couple loans. I don't think there's anything going on in there that feels like a trend.
Got it. Just last for me, Raj, one of your Southeast peers made a comment last week that there's a lot more banks potentially for sale in the Southeast. Maybe just talk through that dynamic. Are you getting more inbounds? How are you just thinking about the broader M&A environment in the Southeast?
Speaker 3
I think mostly I'm getting calls from investment bankers, trying to do the best that they can to, you know, they're feeding the FOMO sentiment, if anything else. Like, everybody's doing a deal. You know, everyone's, you know, you better be talking. That's the sentiment I would say. It's mostly driven from investment bankers. Having said that, I will say there will be more deals. I've been saying that for a better part of a year that, you know, there's a pent-up demand for deals. We're seeing it. We'll see more of it in the coming weeks, months. As a buyer, you know where I stand. We want to build the bank organically. We've had that stand ever since we started the company. On any other deal that makes sense for us, we're always open to having a discussion.
We don't spend our day-to-day thinking about a deal because if you do that, you're not going to build a company. We're focused on building. If a deal ever comes along that makes sense, whether it's tomorrow or 10 years from tomorrow, we're always here to talk about it.
Great. Thank you. Leslie, again, just echo the congratulations on retirement.
Speaker 1
Thank you. Just a quick follow-up on your delinquency question in the C&I bucket. It's actually three loans, and they've been in the criticized classified bucket, but paying for a while, and so not unexpected.
Great, thank you.
Speaker 2
Nor are we seeing any trends from a delinquency perspective that would contribute.
Speaker 1
Yeah, it doesn't look like a trend.
Speaker 4
Thank you. One moment for our next question. Our next question comes from the line of Jon Glenn Arfstrom with RBC Capital Markets. Your line is open. Please go ahead.
Thanks. Good morning.
Speaker 2
Morning.
Speaker 1
Morning, John.
Congrats, Leslie.
Thank you.
Yep, just a few follow-ups. This can be rapid fire as well, but has your buyback appetite changed at all, or is it just your approach and timing?
Speaker 3
Our approach.
Speaker 1
Yeah.
Okay. Do you want to grow the balance sheet over time, Raj, or are we still kind of in the medium term in the loan makeshift mode?
Speaker 3
We certainly want to grow the balance sheet. Hold on one second.
Speaker 1
Yeah, emphatically, yes, we want to grow the balance sheet.
Yes. That's the investment banker's calling, Raj.
Speaker 3
They are entertaining, if nothing else.
Okay. I think I know the answer, but you touched a little on CRE optimism and some slower utilization as well. Is borrower sentiment better than it was a quarter ago? Is it generally improving at this point, or is it kind of the same as it was a quarter ago?
Speaker 2
I wouldn't necessarily compare it to a quarter ago as much as I'd compare it to the beginning of the year. There was a lot more concern about tariff issues and which way the economy was going to head and would interest rates decline, you know, as much as people expected. That was particularly in the CRE investors' mind. I would say clients have a more clear and optimistic view that's getting a little bit better every day.
Okay. I guess, Raj, on the balance sheet growth question, back to that, we were interrupted. Medium term, do you expect to grow the balance sheet? Is it still a near-term makeshift? What are your thoughts there?
Speaker 3
Yes. I expect the balance sheet to grow in the medium term. I do expect the balance sheet to also keep changing the mix because we're not going to stop on the rescue runoff. That'll keep happening, but I eventually expect C&I growth to overtake that runoff.
Okay. Thanks a lot. I appreciate it.
Speaker 4
Thank you. One moment for our next question. Our next question will come from the line of David Jason Bishop with Hovde Group LLC. Your line is open. Please go ahead.
Thank you. Congrats again, Leslie. I've enjoyed working with you over the years, and I think I will cry if you tell me Isis is leaving as well. Quick follow-up question on the NDFI. I appreciate the color there. Just curious in terms of the granularity of both the other and the B2B NDFI. Is that comparable average loan size to the rest of the commercial bank? Just curious if you have any granularity there you can share.
Speaker 2
Probably. I would say if you looked at the NDFI portfolio, the average credit size is maybe slightly larger, but not much.
Speaker 1
It's pretty comparable.
Speaker 2
Pretty comparable. It's a fairly granular portfolio as you look at the entire, like the overall loan portfolio is, where we're generally prudent about taking very large exposures and credits. If you look at this portfolio or the remainder of the whole portfolio, you'll see a lot of mid-sized credit exposures. You will not tend to see extremely large individual credit exposures.
Speaker 1
Is it fair to say, Tom, that we're really not in the business of, or we're really not concentrated in lines to private credit funds?
Speaker 2
No, we're not at all. I mean, our B2B exposure would look like a small handful of BDC corporations, which are very modest facilities in size. We would have credit facilities that are predominantly to real estate investment funds, largely in the Northeast, that have been long-term historical clients and major depository clients of the institution, and we're secured by pledges of assets. These are not, not to say anything negative about any of the large private credit funds, but we're not in, you know, the $2 billion fund to, you know, whatever fund you want to pick that's an unsecured facility for, you know, supporting their general obligations. We're not in those kinds of deals.
Got it. Appreciate the color. Tom, maybe a follow-up question, a final question for you. You noticed some of the headwinds on some of the runoff in the C&I segments and such. Just curious, I don't know if you have a dollar basis or maybe what ending we're maybe in in terms of runoff from some of those, maybe non-core portfolio. Thanks.
Yeah. I'd say we're in the bottom of the ninth inning on that. We're pretty much finished with the work that we wanted to do from a rate perspective, a risk perspective, or a client-focused perspective. We're at the very bottom of the game.
Got it. Thank you.
Speaker 4
Thank you. One moment for our next question. Our last question will come from the line of Steven Skelton with Piper Sandler. Your line is open. Please go ahead.
Thanks, guys. Tom, your last comment was encouraging, kind of similar to what I was curious about. You know, thinking about you guys in, man, 2013, 2014, 2015, was a strong double-digit kind of loan grower. Haven't, you know, loans have basically been flat since 2019. What's kind of the spectrum of how we could think about potential loan growth if we really are, you know, kind of past all the needed remixing? Is it kind of a mid-single-digit run rate in a perfect world, or could it be better than that?
Speaker 3
We'll give you the exact guidance in January.
Speaker 1
Expect growth.
Speaker 3
Yeah. Yeah.
Speaker 2
I would say expect balanced growth across the segments that we're in, across geographies that we're in. When you look at the CRE book, expect us to keep a very balanced portfolio. As the overall size of the bank grows, the CRE book will grow, but it will remain reasonably in line with a 28% to 30% kind of size range. When you look at the asset distribution that we have today, it'll be evenly spread among major asset categories. We will not be overly indulgent in chasing any one asset category. It'll be a balanced growth portfolio.
Got it. It sounds like 2026 could kind of be the inflection point versus what we've seen the last five or six years in terms of loan and balance sheet growth. Is that fair to say?
Speaker 3
Yeah.
Speaker 1
I think that's fair.
Speaker 2
You should remember during that five to six-year timeframe, we were taking the leasing portfolio from $2 billion to a couple hundred million dollars, and we were taking multifamily.
Speaker 1
We were going to strength-regulated multifamily.
Speaker 2
You know, that dropped dramatically by $3 billion plus.
Speaker 1
Minor matter of a global pandemic.
Speaker 2
$3 billion, and we're awful happy to be sitting where we are.
Speaker 1
Yeah.
Yeah, for sure. I think that's why the remix question is important to know if that process is kind of completed after all the puts and takes. Maybe last thing for me, just, you know, obviously, we've seen a bit of an uptick in the banking space in terms of more activism from investors. I'm kind of curious if you've seen any incremental pushback from your investors around the path and the pace of progress and kind of what your response would be, you know, if anyone were to get more aggressive in terms of, you know, asking you guys, "Where's profitability and what's really the pace of improvement to come?
I'll take the first part, and then I'll let Raj take the second part. We have not been getting any increased level of pushback. I'll let Raj answer what we would say if we did.
Speaker 2
We engage. We were happy to engage with anyone. We actually reach out and, you know, do as many conferences as we can and try and go see investors as often as we can. What I want to make sure is that our investors understand the approach that we've taken and the progress that we're making. I wish I could just do, you know, give you a catalyst that tomorrow everything will improve. This is, as Tom said in his earlier remarks, this is a game of inches, but that's how you build a franchise. It's not something, you know, this is a nuts and bolts business, one client at a time business. That's how you build something which sustains in value for a long time. We're open to engaging with any investor who wants to talk to us.
Speaker 1
We do.
Speaker 2
We do all the time. When we sit down and talk to them, I rarely have I come across an investor saying, "I don't agree with what you're doing.
Speaker 1
Yeah, they've been very supportive of what we've been doing.
Speaker 2
They're very supportive.
Speaker 1
I think they asked some of the same questions that you guys are asking, "What's our more medium and longer-term thoughts about growth?" We haven't gotten, I think they've been supportive of what we've done thus far.
Speaker 2
Yeah.
Perfect. Thanks, guys. Appreciate the transparency. Leslie, congrats on the retirement.
Speaker 1
Thank you.
Speaker 3
Thank you.
Speaker 4
Thank you. I would now like to hand the conference back over to Rajinder Singh for closing remarks.
Speaker 3
Thank you all for joining me and joining us. We will talk to you again, minus Leslie, in 90 days. Leslie is going to be, she'll be listening. She'll be asking questions.
Speaker 1
Yeah, I'll get the Q&A.
Speaker 3
Thank you so much. If you have any more detailed questions, you know how to reach either Jim or Leslie. Feel free to call us. Thank you. Bye.
Speaker 1
Yep.
Speaker 4
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.