BankUnited - Earnings Call - Q4 2024

Executive Summary

• EPS beat and margin expansion: Diluted EPS was $0.91 vs management-cited consensus of $0.73, driven by lower deposit costs and steady NIM expansion to 2.84%; ROA/ROE improved to 0.78%/9.7%. Overall net interest income rose to $239.3M and non-interest expense fell YoY due to the prior-year FDIC special assessment.
• Funding mix improved: Average cost of total deposits fell to 2.72% (interest-bearing to 3.75%); non-interest DDA was 27% of deposits; wholesale funding fell $346M QoQ and $2.3B for 2024; loan-to-deposit ratio declined to 87.2%.
• Asset quality manageable with targeted office pressure: NPLs rose to 1.03% (one CRE office loan) while ACL/loans held at 0.92%; net charge-offs were 0.16% for 2024, and office portfolio remains well-reserved (office ACL 2.30%).
• 2025 guidance: Management targets NIM >3% later in 2025, mid-single-digit deposit growth, double-digit NIDDA growth, core C&I/CRE mid- to high-single-digit growth, and ETR ~27%; provision likely higher as ACL trends toward ~1% by YE25; Q1 margin headwind of 3–4 bps from hedge roll-off.
• Potential catalysts: Sustained margin expansion, deposit cost tailwinds, and clarity on CRE office outcomes; a $0.29 dividend was declared for payment on Jan 31, 2025, reinforcing capital return cadence.

What Went Well and What Went Wrong

• What Went Well

  • NIM and deposit cost: NIM rose to 2.84%, with average cost of total deposits down 34 bps QoQ to 2.72% and interest-bearing deposits down 45 bps to 3.75%; management emphasized proactive repricing and strong NIDDA trends.
  • EPS outperformed consensus: “I turn to Leslie and say… What is the consensus… yesterday, she told me the consensus was $0.73… I’m happy that we’re significantly above… $0.91”.
  • Funding mix and liquidity: Wholesale funding fell $346M QoQ and $2.3B for 2024; same-day liquidity of $15.5B; CET1 at 12.0%; TCE/TA 7.8%.

• What Went Wrong

  • Office exposure drove NPL increase: NPLs increased by ~$26M QoQ due primarily to one CRE office loan; NPL ratio rose to 1.03% and NPAs to 0.73%.
  • Loan yields fell with rates; C&I payoffs weighed: Loan tax-equivalent yield declined to 5.60% from 5.87% QoQ; C&I balances weakened due to payoffs; total loans fell $101M QoQ.
  • Provision higher vs Q3, and hedges to pressure Q1 margin: Provision was $11.0M vs $9.2M in Q3; management flagged 3–4 bps margin pressure in Q1 2025 from hedge roll-off; provision likely higher in 2025.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to BankUnited's Fourth Quarter and Fiscal Year 2024 Earnings 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'll need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jacqui Bravo, Corporate Secretary. Please go ahead.

Jacque Bravo (Corporate Secretary)

Thank you, Michelle. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s Fourth Quarter 2024 Results Conference Call. On the call this morning are Raj Singh, Chairman, President, and CEO, Leslie Lunak, Chief Financial Officer, and Tom Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries, or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved.

Such forward-looking statements are subject to various risks and uncertainties and assumptions, including those related to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside of 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 it results in 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 31st, 2023, 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 (Chairman, President and CEO)

Jacqui, thank you. Welcome, everyone. Thanks for joining us. I know it is a busy earnings day. We'll try to wrap this up in an hour or less. We're reporting an exceptionally strong quarter and a very good finish to the year, a pretty good year for BankUnited. The earnings release has been out for the last hour or more, and I'm sure a lot of you have already gleaned through it. Since it's a busy day, and if you don't get to see all of the numbers we put out and all the supplemental information we put out, if there's only one page that I would like you to focus on, it would be a new slide that we added in our board deck, which is slide number six.

It kind of lays out the progress that we've made as a company, not just last quarter, but over the last year, quarter by quarter. That is, like I said, if you don't read anything else, that's the only page you focus on, you'll get the gist of what we're going to say today, and also we'll provide some guidance for next year as well, so what does page six say, and here I will take a little bit of time. It lays out EPS, net interest margin, ROA, and ROE for every quarter over the last five quarters, and the actual numbers are important, but what's more important is the trend that you will see in those numbers, and by the way, these numbers have been adjusted for the FDIC special assessment charge in fourth quarter of 2023.

Our EPS grew from fourth quarter of 2023 was $0.62, first quarter was $0.64, second quarter was $0.72, third quarter was $0.81, and we're just announcing today $0.91. Likewise, our margin, which fourth quarter of 2023 was at 260, actually went down a little bit to 257. That's a seasonal adjustment. Went up to 272, to 278, to 284. That's what we're announcing today. ROA was 52 basis points back then, went up to 54, to 61, to 69, to 78, which is what we're announcing today. And ROE, which was at 7.3% then, stayed at 7.3% in the first quarter, to 8% in the second quarter, to 8.8% in the third, and 9.7% this quarter. So there's a lot of metrics on our scorecards and a lot of things we look at, but eventually, it all boils down to these three or four things.

No matter how you look at this, this has been a phenomenal year of delivering on the things that we set out to deliver that I talked to you about this time last year. I'm very happy to report net income came in at $69.3 million, $0.91 a share. I always ask the day before earnings. I turned to Leslie and said, "Please, could you pull up your EPS estimates for us? What is the consensus?" I think yesterday she told me the consensus was $0.73. I'm happy that we're significantly above where the consensus was. $0.91 is better than the $0.81 that we reported last quarter. Great progress over the quarter as well. The place where we really outperformed, even to our own expectations from three months ago, was really on the margin.

We thought margin, based on our internal assumptions, was going to be flat at best this quarter, but we actually did much better. We came in six basis points higher at 284 from 278 last quarter, and that's mostly because, on the deposit side, we did much better than we thought we would. You know, fourth quarter is a seasonally difficult quarter because a certain number of businesses do lose deposits, and they did lose deposits this quarter, but our other businesses made up for those, and the deposit story came out much better, so quickly going through the deposits, the cost of deposits came down very nicely. It has declined by 34 basis points to 272 from 306 last quarter. Cost of interest-bearing deposits actually came down 45 basis points to 375. It was 420 last quarter.

On a spot basis also, we came down to 263 from 293. Now, despite all the seasonal headwinds that I just mentioned in some of our businesses, average non-interest DDA, instead of going down, actually went up. It was up $173 million, which is what feeds into the better-than-expected margin story here. Just a shout-out to all our business lines who contributed to that, and none of them are on the line. Our ending non-interest DDA was basically flat, was declined only by $19 million. Much better than what we were expecting. Loans were down $101 million, mostly because of the runoff that we've already talked to you in resi and some of our non-core portfolios, like leasing and franchise finance. If I look back over the year, non-interest DDA grew, so non-interest DDA grew by $781 million for the year. Total deposits grew by $1.3 billion.

Non-brokered grew by $1.4 billion. And wholesale funding, which has also been a big priority for us, taking it down, was down $2.3 billion for the year. Core, C&I, and CRE grew by $470 million for the year. And resi and non-core loan portfolios declined by $959 million. Our loan-to-deposit ratio now stands at 87.2%. A year ago, it was close to 93%. I think it was 92.8%. Credit still looks solid. I think this year, we clocked net charge-offs at 16 basis points for a commercial bank. I still think that is a fantastic number. NPAs are very manageable at 63 basis points. This excludes the guaranteed portion of SBA loans. NPLs did go up $26 million this quarter, all attributable to one office loan. But we've seen that coming for a while, and we are properly reserved for it. CET1 is at 12%.

And if you include the AOCI and then run it again, it's at 10.9%. TCE to TA ratio is now at 7.8, and book value per share keeps going up. It's at $36.61. So quickly, before I hand it over to Tom and Leslie, I want to talk about. This is the time we give guidance for the year. But before I give guidance for this year, let me just kind of step back. A year ago, what did we say, and where did we end up? So last year, this time, we had said that balance sheet would remain essentially flat, and that's what happened. We were down like 1%. We said deposits, that non-interest DDA would grow double digits. We grew at 11.4%. We said total deposits grow mid-single digits. We grew at 5%. We said non-brokered total deposits would grow slightly more, and yes, they did.

We grew at 7%. We also said that we would continue to pay down wholesale funding. We paid it down by $2.3 billion. We guided that the margin would end up in the high twos by the fourth quarter. We ended up at 284. We said that there'd be a mid-single digit increase in NII, where it was up 5%. We also said that expenses would be mid-single digits, excluding the FDIC assessment. It came out at 6%. Loans, we initially had said that total loans will be up low single digits, and commercial would be up high single digits. There on the commercial side, we missed a little bit. It was a little lighter than what we thought, mostly because the payoffs, which are much harder to predict, were much higher. Production actually came in just fine. It's the payoffs that surprised us.

And by the way, along this, we also said we will continue to build our ACL, which we did. We started the year at 82 basis points. We ended the year at 92 basis points. So in other words, in terms of everything that we said we were able to deliver, it makes me very, very happy. And it all results in basically ROA, ROE, EPS all moving as substantially as they have. So this has been a very good year. Now, guidance for next year, this will feel like a déjà vu moment because I'm going to give you the same guidance I gave last year, which is that, so no major changes in fundamental strategy. We still want to keep improving the profile of the left side and the right side of the balance sheet to improve our metrics.

Number one priority has been and will continue to be growth in non-interest DDA. That is the most important driver for us achieving what we want to. non-interest DDA, we'd like it to grow double digits again. Total deposits should grow mid-single digits, and there's not much in terms of paying down wholesale. We paid down so much of it, but on the margin, we'll probably pay that down as well. Loan growth, again, same guidance as last year, that non-core and resi will continue to decline, and commercial and CRE will grow high single digits, and total growth will end up somewhere in between. Expenses, similar to last year, mid-single digits growth in expenses, and on margin, sometime later this year, we should get past 3%.

That's what we're going to. It's hard to say exactly when it'll happen, but it'll be in the later half of the year that we should get to 3% and hopefully beyond that. So if we are able to deliver all those things the way we've laid out, I'll be able to hopefully come to you again next year and show you a chart like the one we're showing on page six and even better numbers at this time next year. I do want to remind that there is seasonality in the business, and Leslie will probably put a finer point to it, both in our deposits and our lending. So just be aware of that. Deposits are generally much stronger in the first half of the year, not less so the second half.

Loans are generally the second, third, and fourth quarter, first quarter being a difficult one to underwrite new business in given the end of the year stuff. But other than that, am I missing anything, Leslie, Tom? No. All right. I'll turn it over to you, Tom. Okay.

Tom Cornish (COO)

Thank you, Raj. So let's talk a little bit about loans first. As Raj mentioned, in total, loans were down by $101 million this quarter. Core, CRE, and C&I segments grew by $185 million. Mortgage warehouse was up by $14 million, while as Raj mentioned, the Resi, franchise, equipment and municipal finance were down by a combined $299 million. For the fourth quarter, the core commercial segments grew by 1.2% or about 5% on an annualized basis. I would say that over the course of the year, we were pretty happy with production all year long.

It was a good production year, really, across all of our C&I segments, corporate banking, commercial banking, small business, and CRE. As Raj mentioned, we did have some impact from payoffs this year. That kind of ebbs and flows. It's difficult to predict, but when we look back at the year and the quarter from a total production perspective, we're very happy and think that will continue into the first quarter as we see the pipelines. On a year-to-date basis, the C&I and CRE portfolios were up a combined $470 million. Mortgage warehouse was up $153 million. And as Raj mentioned, residential was down $628 million. Franchise equipment, municipal finance all declined by a combined $331 million. And all of this was consistent with our repositioning strategy on the left-hand side of the balance sheet. Overall, we're still optimistic about seeing good C&I growth and good CRE growth next year.

We continue to operate in very favorable markets, and I think the overall economy, as we see it, is going to be very good in the markets and the segments that we operate in, so we continue to be encouraged by the pipeline that we see and growth opportunities for 2025. A few minutes on CRE; refer you to slides 12 through 15 of the supplemental deck. Our CRE exposure totaled 26% of loans and 169% of the bank's total risk-based capital. It's 12/31/24, so we had good growth. We still have a moderate CRE portfolio. Comparatively, based on the September 30, 2024 Call Report data, the median level of CRE loans to total loans for banks in the $10 billion-$100 billion bank range was 35%, and the median ratio of CRE to total risk-based capital was 222%.

As you can see, while it's an important part of our bank, it's still, compared to peers, lighter from a balance perspective. At December 31st, the weighted average LTV of the CRE portfolio was 55%, and the weighted average DSCR was 1.76. 54% of the portfolio was in Florida. 25% was in the New York Tri-State area. So as it relates to office, we continue to monitor that carefully. We are seeing positive signs incrementally across the board in leasing activity, in abatement rolloffs, and even a little bit in the last quarter in terms of shortening of abatements on new leases. And everybody reads the general trend that a lot of companies have towards going back to the office. So we have been over this portfolio about 9,000 times analytically. And I think at this point, you did see one tick up in a non-performing loan for the quarter.

But for the most part, we have identified everything that we think has any level of challenge to it. We've been working with a small number of loans that are providing a challenge very closely. Generally, we have quality sponsors. And we think that while there could be some losses over a period of time, we think it'll be relatively modest to the company. But the rest of the portfolio continues to perform very well as it relates to office and as it relates to CRE. The data points are at December 31st, we had a total office portfolio of $1.8 billion. 57% of that was in Florida, predominantly suburban, 23% in the New York Tri-State area. Of the $1.8 billion, $350 million, or 20% of the total CRE office portfolio was medical office. That's really the only component that grew last year.

The construction portfolio includes an additional $88 million in office-related exposure, with $85 million of that in New York. The weighted average LTV of the stabilized office portfolio was 65%, and the weighted average debt service coverage ratio was 1.57 at December the 31st. So as you can see, 1.57 is a pretty good number. It's been pretty stable. At that number for most of the year, it's actually up one basis point from the previous quarter. So we are seeing more stability, more positive trends, abatements rolling off, and things that are, at least in all of the major markets that we're in, generally favorable. $528 million of the office loans mature in the next 12 months. $277 million of this is fixed rate. Rent rollover in the next 12 months is only 12% of the portfolio.

With respect to the stabilized New York Tri-State portfolio, 41% is in Manhattan. This is approximately $169 million and has a 95% occupancy and a lease rollover in the next 12 months of 10%. As I said, debt service coverage ratios and occupancy levels are showing some signs of improvement, and a number of our sub-markets, generally what you see in Florida, in Texas, and the Southeast, is continued strong new-to-market companies where we see positive leasing activity across the portfolio. Generally, it's new-to-market companies coming into the market, which is healthy overall for the market. In the Northeast, it tends to be more tenants moving from one building to another, not as much new market activity, but again, the majority of the portfolio is in the Florida and Southeast.

Since 2020, we've had total charge-offs in the office portfolio of $8.3 million, so relatively minor, related only to four loans. While the exact amount of the ultimate lost content is obviously still to be determined, we see it pretty manageable. As Raj mentioned, we had one non-performing CRE loan increased by $25 million this quarter. It's related to one office loan that was in a substandard rating category that we've been following for a long time. This was not a surprise to us. Overall, the CRE portfolio, beyond a couple of these loans, continues to perform very well. On the deposit front, we're quite optimistic heading into 2025. We are a bit seasonal. We do expect to see really nice growth in the first two quarters. Strong relationship, strong pipelines, new account activity is very good.

Raj and I have had the pleasure of attending a couple of wonderful celebrations for teams that have hit great milestones for new relationship activity, new account activity over the last couple of quarters. And I think in general, our overall deposit pipeline looks very strong heading into 2025. So with that, I would turn it over to Leslie.

Leslie Lunak (CFO)

Thanks, Tom. To reiterate, net income for the quarter was $69.3 million or $0.91 per share for the year. Adjusting out the impact of the FDIC special assessments, net income grew by 15%. So we're pretty proud of that. Turning to talk a little bit about the net interest margin and net interest income. Net interest income was up $5.1 million or 2% linked quarter. That's 9% on an annualized basis. The NIM increased 6 basis points to 284 from 278 last quarter. We guided the NIM being flat for the quarter. And as Raj mentioned, average non-interest DDA for the quarter exceeded our expectations, growing by $173 million. And we made better than forecasted progress, reducing the cost of interest-bearing deposits. In fact, for the period September 1, 2024 through January 15, 2025, the realized beta on non-maturity interest-bearing deposits was 81. So we think that's pretty good.

The average cost of interest-bearing deposits declined from 420 to 375, while the average cost of total deposits declined from 306 to 272, and the spot rate to 263 from 293. As you'd expect, the average yield on loans declined from 587 to 560, and the average yield on securities declined from 562 to 531. These are largely floating-rate portfolios. So that was really attributable to coupons resetting down primarily. Looking forward, floating-rate assets will obviously continue to reprice down if rates continue to decline. For the fourth quarter, this was more than offset by the reduction in the cost of deposits. The static balance sheet remains modestly asset-sensitive. We do expect the NIM to increase over the course of 2025 as both the funding mix and the composition of assets continues to improve.

As we've been saying all along, while the static balance sheet is modestly asset-sensitive, margin improvement is predicated on continued balance sheet transformation efforts, and I think we've delivered on that this year, and we expect to deliver on it again next year. A couple of other things underlying the guidance to an increasing NIM. We do expect mid-single-digit growth in total deposits, and we think we can again deliver solid double-digit growth in non-interest-bearing demand deposits. Loans in total probably be up low single digits, but we expect the core C&I and CRE portfolios in the aggregate to be up mid to high single digits. So those are some of the things that underlie those trends. I will remind you that there's some seasonality in the business. Generally, deposits are stronger in the first half of the year, and we see seasonal headwinds in the back half.

Loans are the exact opposite. Usually, the first quarter is the lowest quarter from a commercial production perspective, and it ramps up over the back half of the year. As a result of that, margin expansion is a little bit more challenged in the first quarter. And particularly the first quarter of 2025, we're going to have three to four basis points of pressure resulting from the rolloff of some hedges. But we do expect to see that 3% by the end of the year. So to summarize all of that, I'd say don't get so focused on individual quarters, but let's think about the trend we expect to see over the year. Turning to provision and reserve, the provision this quarter was $11 million. The ACL to loans ratio decreased from 94 to 92. The reserve was 82 basis points at the start of the year.

At the end of the year, the commercial ACL ratio was 137, and the reserve on CRE office was 230. The main reason for the decline in the ACL this quarter was net charge-offs. That's how it's supposed to work. You reserve for them, and then the losses materialize. This was partially offset by specific reserves and an increase related to the economic forecast. Substantially, all the charge-offs we took this quarter related to three C&I loans. As we've said in the past, C&I charge-offs are very idiosyncratic in nature. We aren't seeing any emerging systemic trends of concern at this time. As we've said before, we believe a normalized charge-off rate for a commercial bank is probably somewhere in the 20s compared to 16 basis points that we reported for the year.

We do think the provision's likely to be a bit higher in 2025 than it was in 2024, given the expected shifts in portfolio composition towards more of a commercial portfolio. So it'll likely continue to move toward that 1% level. Non-interest income and expense, nothing really to call out for the quarter that's material in terms of non-interest income or expense. The railcar refurbishment costs that we guided to last quarter of about $8 million did get pushed out into 2025, and I won't try to tell you which quarter because apparently we're not very good at pinpointing that. I know you're going to ask me, so for 2025, I would project both lease financing income and depreciation of operating lease equipment, both of those lines to be about $4 million per quarter, excluding any residual income, and the ETR to be about 27% going forward.

I will close with a brief comment on the LA wildfires. We do have some residential exposure in impacted areas. While this is still obviously an evolving situation, the most recent information we have indicates about $80 million of exposure, so not very much. In zip codes in identified fire areas, we don't expect to find any instances where the property is either uninsured or underinsured, and so therefore, we don't expect this will have any material impact on provisioning or lost content. With that, I'm going to turn it over to Raj for any closing remarks he wants to make.

Raj Singh (Chairman, President and CEO)

Yes. I forgot. I wrote down a couple of things that I want to talk about. One, I just usually talk about the environment while giving guidance. So as you can imagine, there's a lot of positive news. There's more optimism on Main Street, not just on Wall Street. It's a more constructive regulatory environment for all industries, not just ours. So those are positives. I'm comparing this to a year ago, the guidance that we gave you. A year ago, we were worried about, was there going to be a recession? There was some probability of a slowdown or a recession. I think whatever that probability is today, it's much lower, at least in the short term. So there's generally more optimism with our clients, more optimism in the economy. And so that's the good part.

On the negative side is, there's more uncertainty in terms of policy, especially as it relates to trade and the second and third-order impact that might have, especially if there are big changes and sudden changes in policy. So we're monitoring all of that and how that will impact risk in our portfolio. The second, I would say that there is more competition today than a year ago. A year ago, competition really, especially on the lending side, eased off after the Silicon Valley crisis. And we saw widening of spreads starting in summer of 2023. And I would say for the last six months, spreads have been tightening, and we expect them to keep tightening into this year. So there's more competition and tighter spreads. There's more uncertainty with the change in administration.

And hopefully, all of this will amount to nothing, but something that we're keeping an eye on. So overall, I'd still take it than not. One last comment. All the progress that you've seen at BankUnited, first of all, I would say don't ever take any one quarter and annualize anything. You should always look at 12-month trends because the business can be episodic. It can be lumpy. No one ratio should stand on its own in a quarter. And don't take any quarterly thing and annualize it. Second, I would say I'm going to state the obvious that all the progress you've seen is not the result of any kind of financial engineering. We did not go out and sell loans or take a hit on a securities repositioning or any of that.

Every investment banker in the world has come to us and talked to us about how they can magically make our margin better and our earnings can look better if we just take some pain now. We haven't done any of that. I know some banks have, and that's fine. But we haven't done that. So all the improvement you see is just good old blocking and tackling and improving the balance sheet, one asset and one liability at a time. So with that, I will stop, and I'll turn it over for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question is going to come from the line of Woody Lay with KBW. Your line is open. Please go ahead.

Woody Lay (VP and Stock Analyst)

Hey, good morning, guys.

Leslie Lunak (CFO)

Morning, Woody.

Woody Lay (VP and Stock Analyst)

I appreciate all the components of the guidance, but I just wanted to talk about overall NII. If I look at over the past 12 months, it looks like it sort of grew in the 4%-5% range. Is that a good way to think about it going forward, or is there optimism you could come in a little bit above that range?

Leslie Lunak (CFO)

Yeah. Last year, it was up 5%, as you said, Woody. And what we're projecting for next year is mid to high, probably mid to high single digits.

Woody Lay (VP and Stock Analyst)

Yep. Okay. Maybe shifting over to deposits. Raj, I thought it was an interesting comment about the environment changing a little bit. And you reiterated the sort of same deposit guidance as the previous year, but we are in a little bit of a different environment where a lot of peers are talking up the potential for loan growth. So does that present any challenges related to deposit gathering and sort of how do you plan to counter those challenges?

Raj Singh (Chairman, President and CEO)

I'm not worried about demand deposit growth, right? Because I see pipelines. I see how many mandates we have and the accounts we're opening. So I feel pretty good even looking into the first couple of quarters, right? It's hard to look beyond that. Pipeline generally doesn't go beyond six months. But in the first six months where we do a lot of our growth, I feel pretty decent about that guidance. If there is a lot of competition that suddenly rears up in deposit land, it's going to be more on interest-bearing deposits. So that's a little harder to predict. And what's harder to predict is exactly what the price of that will be if demand heats up. We're not seeing it as of right now, but it could happen later in the year.

In fact, so far, the last quarter, as you can see, we've had more success than what we even thought in terms of bringing down the cost of interest-bearing deposits. So the reality on the ground is the deposit competition is not as concerning as the lending side is. The spread tightening that I was talking about is really where the competition is kind of revealing itself. We're seeing much tighter spreads. We're seeing banks going back to doing non-relationship business. A year ago, nobody was doing non-relationship business. If you didn't have deposits, you couldn't get a loan. Now, that's not the case. It's back to the way things were back in 2021, 2022, where we would love to do business only with people who have deposits, but we'll make exceptions all the time. That's sort of the way banks are behaving.

We're still trying to hold the line on that, but it gets harder every month as we see our competition walk away from that discipline. That's where I'm seeing more competition on the lending side than on deposits.

Leslie Lunak (CFO)

I would also add to that your overall question, Woody, that we're projecting deposits up mid-single digits and total loans up low single digits. Some of the funding of new loan production is still going to continue to come from the runoff of the resi and non-core commercial portfolios as well as from deposit growth.

Woody Lay (VP and Stock Analyst)

Right. Yeah. That's great color. And then just last for me, looking sort of at the asset-based expectations, you've done a great job paying down a bunch of wholesale funding. Do you think there's more to go, which sort of keeps the asset base flat over the year ahead, or do you think we could begin to see the base grow from here?

Raj Singh (Chairman, President and CEO)

I think wholesale borrowings, while we've paid down a lot, I don't think we can pay down that much going forward. There'll be some little bit of trimming of that, but not a lot. So overall, the balance sheet will probably be up a little bit rather than being down or flat, as was the case last year, but not by a meaningful amount. It's not like we're projecting high single digits growth. It'll be up a little bit. So it'll be FHLB pay down story is coming to an end.

Woody Lay (VP and Stock Analyst)

Yep. All right. Thanks for taking my questions.

Raj Singh (Chairman, President and CEO)

Yeah.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Ben Gerlinger with Citi. Your line is open. Please go ahead.

Ben Gerlinger (Vice President and Senior Analyst)

Hey. Good morning.

Raj Singh (Chairman, President and CEO)

Hey, Ben.

Ben Gerlinger (Vice President and Senior Analyst)

So I know you guys have made a lot of initiatives over the past couple of years for non-interest-bearing deposit. Leslie, here's your soapbox to stand on. I know title is a big component, and it's grown. There's a seasonality to it. Is there any other ones that you wanted to highlight? And when you think this bigger picture, if I recall correctly, 35% was kind of the longer-term goal of mix. How do you guys see that over the next couple of quarters here? I know that you have the tailwinds, but just kind of what's the momentum looking like over the next 180 days?

Raj Singh (Chairman, President and CEO)

We're at 27% right now, DDA to total deposits. I will be very happy if we get to 30% this year, which is a lot of growth, but we're shooting for that. When do we get to mid-30s? It's a little more sort of medium-term, long-term answer, and I can't pinpoint beyond this year. But this year, we're pushing to get to 30% and hopefully a little bit above that.

Ben Gerlinger (Vice President and Senior Analyst)

Okay. That's helpful. And then just two kind of cleanup questions. Leslie, I know you said margin could be down or I think you said down four basis points in one Q, or are you just highlighting the specific margin?

Leslie Lunak (CFO)

Yeah. Let me clarify that. I didn't say margin would be down four basis points in one Q. I said that margin expansion would take place over the course of 2025, would be more challenged in one Q because there will be three to four basis points of pressure from the roll-off of hedges. But that doesn't translate to margin being down three to four basis points. And again, I'm probably a whole lot less focused than you are on what happens in the, unfortunately for you, but what happens in the first quarter versus the second quarter versus the third quarter. I'm really much more focused on the trend over the year, which should be expansion.

Ben Gerlinger (Vice President and Senior Analyst)

Gotcha. Yeah. I thought it was just like you said, it's a higher hurdle for one Q, but.

Leslie Lunak (CFO)

Yes. Correct. That's correct. Yes.

Ben Gerlinger (Vice President and Senior Analyst)

And then you said expenses, and then you're not going to try to pinpoint rail car, but is that mid-single inclusive of that, or should we?

Leslie Lunak (CFO)

Yeah. Expenses as reported, including the rail car costs, up mid-single digits on a GAAP basis year over year is what our guidance is.

Ben Gerlinger (Vice President and Senior Analyst)

Appreciate the color. Thank you.

Operator (participant)

Thank you, and one moment as we move on to our next question. Our next question is going to come from the line of Timur Braziler with Wells Fargo. Your line is open. Please go ahead.

Timur Braziler (Director of Mid-Cap Bank Equity Research and a Senior Equity Analyst)

Hey. Good morning.

Ben Gerlinger (Vice President and Senior Analyst)

Raj, last quarter, you had laid out ROA over 1%, return on equity kind of 10%-12%, the NIB we just talked about over 30%, and it taking a better part of next year to get there. I'm just wondering, with the Q4 result, does the magnitude of those profitability ratios or the timing change, or are you still thinking that it's going to take much of 2025 to get you over those hurdles?

Raj Singh (Chairman, President and CEO)

Our guidance, we provide one-year guidance. We don't try to go beyond that because it becomes very dicey to look past 12 months. I would say that we're marching in that direction. It's very hard to say exactly when we get there, but I'm happy to see this progress we've made last quarter, which, like I've said a couple of times already, was surprised even us. 78 basis points ROA is still not 1%. Still work to be done, but I can't tell you exactly when we will get there, but I like the direction we're moving in and the speed with which we're moving in that direction, and by the way, 9.7% ROE, pretty damn close to 10%, but we certainly don't want to stop at 10%. We want to get higher.

This business model should get you past 1%, like I've said in the past, and past low double digits, 12-13% ROE. But exactly when we get there, it's a little hard to say.

Timur Braziler (Director of Mid-Cap Bank Equity Research and a Senior Equity Analyst)

Got it. And then I appreciate all the color on the DDA transition or momentum there. But just maybe looking at Q4 specifically, is there a way to quantify what the typical or what the seasonality was in fourth quarter that was backfilled by new production? Can you kind of frame the success of that in Q4, which is typically a seasonally soft quarter?

Leslie Lunak (CFO)

Yeah. No. We're not going to try to get that specific.

Raj Singh (Chairman, President and CEO)

Yeah. Yeah. I mean, we have talked about the title is down, and it was down exactly as we predicted, but everything else was up, which is what filled in that gap, so we're very happy, and title becomes a very sort of predictable business because now we've done it for so long, so we can very accurately look at the ups and downs. I'm happy with everybody else who pitched in and helped fill that gap.

Leslie Lunak (CFO)

We really don't disclose results at that granular of a level by business line. We're not going to.

Timur Braziler (Director of Mid-Cap Bank Equity Research and a Senior Equity Analyst)

Got it. Got it. And then just last for me, Leslie, you had mentioned on the loan side that the seasonality is kind of opposite of deposits, where it's slower at the beginning of the year, stronger at the end of the year. I guess I'm a little surprised on the C&I side and 4Q with those balances being essentially flat quarter on quarter. Can you maybe talk through the dynamics of what happened in 4Q? Is there anything that gets pulled forward into the first quarter and just maybe more broadly as to the environment?

Raj Singh (Chairman, President and CEO)

Yeah. That flatness you saw was entirely because of payoffs that are very, very difficult to predict.

Leslie Lunak (CFO)

Yeah. All I can predict is production, which is normally lighter in the first quarter and then ramps up towards the back half of the year. But I can't predict the timing of exits and payoffs and those sorts of things, unfortunately.

Tom Cornish (COO)

Yeah. You also have a mixture in there of things that lead to payoffs like company sales. I mean, company sales is extremely hard to predict. That was a big piece of it. And Raj mentioned the competitive market. We are seeing more competition across the board virtually in every line of business from debt funds. I mean, there's trillions of dollars of debt funds that are out there, and they are increasingly playing a role in formula-based lending and non-traditional lending. So that's also kind of hard to predict because it tends to be episodic around acquisition financing or something like that, where there's a more competitive structure on the table at near bank-like financing rates. But again, we focus predominantly those things will come and go. They're hard to predict. And some quarters, there's more, and some quarters, there's less.

But as long as our overall new production is at the levels that we want it to be and the pipeline looks very good, we know over a period of time that'll even out.

Timur Braziler (Director of Mid-Cap Bank Equity Research and a Senior Equity Analyst)

Great. Thanks for the questions.

Operator (participant)

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

David Bishop (Director and Senior Equity Research Analyst)

Yeah. Good morning, Raj, Leslie, and folks.

Ben Gerlinger (Vice President and Senior Analyst)

Morning.

David Bishop (Director and Senior Equity Research Analyst)

Hey. Curious, Leslie, maybe question for you, the increase in the unrealized loss on the securities portfolio. Is that purely rate-driven? Anything credit-related on some of those segments?

Leslie Lunak (CFO)

No. Nothing credit-related. It's spreads, really, more than anything. It's a rate mark and driven to some extent by spreads, but it's a rate mark, not a credit mark.

David Bishop (Director and Senior Equity Research Analyst)

Got it, and then did see the decline in loan yields. You noted the floating rate nature of the portfolio. Given if the Fed is pausing here or sort of dialing back, just curious maybe where you see the trend in loan yields over the near term?

Leslie Lunak (CFO)

I mean, if the Fed doesn't cut again, they should stabilize. Actually, they should go up because new business is coming on at a higher rate than things that are maturing and paying off. So if the Fed doesn't move again, we should actually see them in flux.

David Bishop (Director and Senior Equity Research Analyst)

Any sense of what new production's coming on these days?

Leslie Lunak (CFO)

Yeah, I have those numbers somewhere. Hang on. Give me a minute. I would say in the fourth quarter, commercial production averaged a little over seven and a half, so a little over seven and a half for the fourth quarter.

David Bishop (Director and Senior Equity Research Analyst)

Great. And then finally, maybe a holistic question, Raj. You noted the change in administration. Who knows how the tariff situation will play out? Any way to ring-fence or you could quantify maybe segments or loan portfolios that are maybe impacted that could feel the impact of tariffs on the commercial side? Next.

Raj Singh (Chairman, President and CEO)

Not too soon, and very hard because it's not just the obvious direct impact. It can be second and third-order impacts, which are very, very difficult to predict.

Leslie Lunak (CFO)

Yeah. Just way too soon, I think.

Raj Singh (Chairman, President and CEO)

Yeah. Yeah.

David Bishop (Director and Senior Equity Research Analyst)

Got it. Appreciate the color.

Operator (participant)

Thank you. And as a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment as we move on to our next question. And our next question is going to come from the line of Stephen Scouten with Piper Sandler. Your line is open. Please go ahead.

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Yeah. Thanks. Good morning, guys. I just wanted to follow back around, Leslie, on your commentary kind of around the mid to high single-digit NII expansion potential for the year. Sounds like balance sheet will be relatively flat. And then I think you said maybe the NIM could peak above 3% in the back half of the year. So is it fair to convey from that math that most of the upside is coming from that NIM expansion, not especially loan growth or balance sheet growth?

Leslie Lunak (CFO)

Yeah. I think that's probably fair and mix transformation, which is what the margin is reflecting. Yes. I think that's fair.

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Got it. Perfect. Just wanted to clarify. Thank you. And then around the non-interest-bearing deposit growth, maybe particularly around the tail end of the year, can you remind us what kind of expense component might be related to that, whether it's ECR or otherwise, that kind of gives the full picture of what's going on with those inflows?

Leslie Lunak (CFO)

We haven't disclosed that business line results at that specific of a level and we're probably not going to do that.

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Okay. Fair enough. And then maybe just last thing for me, and apologies if I missed it at all, but the one office loan that you guys called out, I think you said it was $26.2 million maybe, or at least that was the.

Leslie Lunak (CFO)

The one is 25.

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Okay. Is there any additional color you can give there around the specific LTVs of that or any specific reserves that might already be allocated on that loan or any additional color there?

Leslie Lunak (CFO)

Other than to say we feel like we're adequately reserved. We try not to get into too many details about one specific credit. You're kind of walking a fine line there, so.

Raj Singh (Chairman, President and CEO)

But we have a specific reserve on it.

Leslie Lunak (CFO)

Yeah.

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Okay. And market by chance, is that something that can be commented on?

Raj Singh (Chairman, President and CEO)

It's in the North, but it's not New York City.

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Gotcha. Gotcha. Okay. Great. Well, thanks for all the color. Appreciate the time today.

Raj Singh (Chairman, President and CEO)

Okay.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Jon Arfstrom with RBC Capital Markets. Your line is open. Please go ahead.

Jon Arfstrom (Managing Director and the Associate Director of US Research)

Thanks. Good morning.

David Bishop (Director and Senior Equity Research Analyst)

Good morning.

Jon Arfstrom (Managing Director and the Associate Director of US Research)

Leslie, question for you. When would you like to get to that 1% area on the reserve level? Do you have a timeline for that?

Leslie Lunak (CFO)

Oh, on the reserve. I thought you were going to say on ROA. I was going to say tomorrow. You asked me when I'd like to get there. It's not so much when I'd like to get there on the reserve, Jon. It's when I think we're likely to get there. And I would say we're likely to get there by the end of 2025. But that's predicated on our projected portfolio remix. So if we have more commercial loan production than we're projecting, we'll get there faster. If we have less, we'll get there a little slower.

Raj Singh (Chairman, President and CEO)

It's also dependent on what the economy is saying.

Leslie Lunak (CFO)

That's assuming the economy remains stable and supportive, obviously. If that doesn't happen, all bets are off about that.

Jon Arfstrom (Managing Director and the Associate Director of US Research)

Yeah. Okay. Makes sense. And then, Tom, maybe for you, kind of a harder question, but what should we expect on losses? Would you consider this quarter kind of an aberration, or should we expect kind of a consistent flow of losses? I know you've said you're reserved for a lot of this, but do you have any thoughts on that NCO?

Raj Singh (Chairman, President and CEO)

Let me take that one, and Tom can fill in. For the year, our charge-offs came at, what was it, 16 basis points. Net charge of 16 basis points for a commercial bank is a pretty decent level. In fact, I would say they are probably a little too low on a sustainable basis. The issue with commercial banks, unlike consumer banks, is that our losses, if you look at our losses in any one quarter, this is probably my comment I was making about don't take any one thing in any one quarter and annualize it. This is probably the most true when it comes to charge-offs because you could have a quarter at two basis points, and then you can have another one at 25 basis points and go back to four basis points.

It's all over the place because only one or two loans can swing that number a lot. So I think it's really important to look at a 12-month rolling or something like that to truly get a full picture. I know the losses we took this quarter. It's not a lot of loans. It's basically three loans, and next quarter it could be zero. It could be one. It could be two. You will have some losses, but measuring any one quarter and extrapolating from that can be dangerous, so I'd say look at four quarters trailing at any given time, especially for that ratio, but for most ratios, I think you should do that and not focus in on any one particular quarter.

Leslie Lunak (CFO)

Losses in a commercial portfolio are very idiosyncratic, so.

Jon Arfstrom (Managing Director and the Associate Director of US Research)

I know it's not an easy question, but that framework helps. And then, Raj, just a question for you. Do you have any regulatory changes wish list maybe that would be helpful or maybe less challenging for most people?

Raj Singh (Chairman, President and CEO)

I will actually probably stand out from my peers in saying that I really had no complaints to begin with. I think regulators, for the most part, I really have nothing to complain about for the last several years. Even through the crisis when you get most concerned that after a crisis, you may end up paying for sins of another bank, we didn't see that. We saw. If there's any complaint that I would have is something that we don't do much of on the M&A side. We're watching a lot of M&A transactions get held up for a long time, which I know is not good for the system. It's not good for the communities these banks serve. So I think we'll see more M&A going forward. Again, it doesn't impact us directly, but it impacts us indirectly.

More M&A means not that we will participate in this, but it'll create a lot of disruption. It'll create opportunity for us to pick up organically some business. So indirectly, it'll be a good thing for us. But other than that, I really can't say that this is some kind of a big moment to celebrate on the regulatory front. There's nothing really happening from our perspective on the regulatory front. For the last few years, it's been fine.

Jon Arfstrom (Managing Director and the Associate Director of US Research)

Yeah. Okay. Fair enough. Thank you.

Operator (participant)

Thank you and one moment. Our last question is going to come from the line of Jared Shaw with Barclays. Your line is open. Please go ahead.

Jared Shaw (Managing Director and a Senior Equity Research Analyst)

Hi. This is John Rao for Jared. Just real quick on the loan remixing, loan composition remixing, how big is the non-core commercial portfolio just in terms of dollars?

Leslie Lunak (CFO)

I mean, you can see that there's a table in the press release that breaks that out pretty clearly. On page two of the press release, $200 million in franchise and equipment finance, $720 million in municipal finance. Then, I mean, mortgage warehouses right now at $585 million. We want to call that core or non-core, but we're not trying to run that down. That should grow, not run down. Those numbers are all laid out in detail on the second page of the press release.

Jared Shaw (Managing Director and a Senior Equity Research Analyst)

Okay. Great. Thanks. And then just on capital levels, CET1's getting up there. I guess any priorities on use of capital going forward? I think buybacks were talked about a little bit last quarter as a possibility. Just what's a good capital level for you guys and how would you manage that?

Tom Cornish (COO)

From a capital perspective, I'd say what do we say? Our CET1 ratio is now about 12%. We benchmark ourselves to our peer groups. I think we're kind of smack in the middle. It's not like we're on the far end of that curve in terms of excess capital. You could argue for a small buyback, but it's not going to be a very big one. I don't think it'll move the needle much at all. We will continue to talk about it at every board meeting. The next board meeting is in February, but I don't think there'll be much movement over there. And some of the uncertainty I talked about is still very much going to be on our mind to see how all of the stuff that will change will impact the bank. So I think we'll stay put for the time being.

There is a cadence that we've had with dividend increases. So that'll also be looked at in February. I don't want to speak before that meeting happens, but you can look at the cadence over the last couple of years and predict from that what we will do. But other than that, not really much happening on the capital front.

Leslie Lunak (CFO)

Agreed.

Raj Singh (Chairman, President and CEO)

Okay. Thanks. That's clear. Okay. Thanks. That's all.

By the way, I just want to go back to one question, the previous question about regulatory question about what positives. I think the one positive that I do see is there's a lot of stuff that was proposed on CRA, on brokered deposits, some climate rules, and SEC stuff. The fact that that was taking a lot of mind space for us, right, getting ready for all those things and what impact it will have and how do we need to tweak our business or not tweak it, that uncertainty goes away and creates room for us to actually work on other stuff. So that is definitely a positive. I've seen an email from somebody yesterday that these are all the lists of things that the FDIC is talking about not doing. Not about doing, but not doing.

That certainly is a big positive for stuff that could have been in the pipeline and would have taken a lot of time and effort from us if it had come to fruition. That, we're happy about.

That would also add a more business-oriented regulatory environment for all of our clients. It's beneficial to us. It's beneficial to the entire industry.

Leslie Lunak (CFO)

Yeah. It's beneficial to the whole industry. Yeah.

Raj Singh (Chairman, President and CEO)

Yeah. Yeah.

Operator (participant)

Thank you. And I would now like to hand the conference back to Raj Singh for any closing remarks.

Raj Singh (Chairman, President and CEO)

Now, thank you very much for joining us. Like I said, this is a strong finish to a strong year. And hopefully, the strength will continue to deliver on this. A year from now, we can come back to you with a similar story. But thank you for taking interest in listening to us. And if you have any detailed questions, you know how to reach Leslie or myself. Thank you. Bye.

Operator (participant)

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