Ladies and gentlemen, thank you for standing by, and welcome to the BankUnited Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker host today, Susan Greenfield, Corporate Secretary of BankUnited. Please go ahead.
Thank you, Olivia. Good morning and thank you for joining us today on our 3rd quarter results Conference Call. On the call this morning are Raj Singh, our Chairman, President and CEO Leslie Lunak, our Chief Financial Officer and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflects the company's current views with respect to, among other things, future events and financial performance. Any forward looking statements made during this call are based on the The historical performance of the company and its subsidiaries are 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 and assumptions, including without limitation, those relating to the company's operations, financial results, Financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-nineteen pandemic. 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. Information on these factors can be found in the company's annual report on Form 10 ks for the year ended December 31, 2020, and any subsequent quarterly report on Form 10 Q or current report on Form 8 ks, which are available at the SEC's website, at www.sec.gov. With that, I'd like to turn the call over to Raj.
Thank you, Susan. Welcome, everyone. Thank you for joining us For our earnings call, let me make a quick few remarks about the what we're seeing in our markets 3 months ago when we met you on this call, Delta was Beginning to surge, Florida seemed to be caught up in it more than probably any other state. And there was a lot of concern as to whether that will impact the economy and to what extent. I'm happy to report 3 months into it.
Now Delta seems Fairly in the rearview mirror. I checked the numbers just a few minutes before this call. I think they've come down to even lower than they were 3 months So we're happy about that. What we're most happy about is also that it did not actually have the same kind of impact That previous searches have had on the economy. I think the economy is learning to deliver these surges as and when they happen.
Hopefully, there won't be any more. But at least Over the last 3 months, we did not see a significant impact to the local economy here or in other parts of the country where we do business. But it's good to see Delta behind us, obviously, with a fair amount of pain that everyone took on the healthcare side. The Delta Search did put our plans about return to office on hold a little bit. We had started bringing people back in, in the summer.
We had Later today, I will be making a call internally and we will be talking about how we're going to restart that process. Our expectation is that by January, 1st week of January, we will be in the new normal and between now and then slowly start bringing people back. We're going to start that, believe it or not, even for Board meetings. We've not had an in person Board meeting since the start of the pandemic. Yesterday, the Board met Telephonically, I decided it was time to start meeting in person, our first in person board meeting, which will be over 2 days in the middle of November.
I'm excited about that too. Overall, the economy here in Florida is doing well. There are obviously widespread labor shortages and The supply chain disruptions that everyone has talked about, we are seeing that, our customers are feeling it. Indirectly, we're feeling that as well. But it's hard for me to say when those will resolve themselves, but that is the challenge that we're dealing with.
I look at this, the biggest economic crisis of our lifetime That we went through, if 18 months into it, if all we're dealing with is supply chain issues and labor shortages, I think that's a pretty good place This could happen a lot worse. So I take this as actually a victory that these are the issues. This could happen a lot worse. So I'm thankful for Where we are and how this pandemic has been resolved. Quickly getting into our quarter, we posted net Of $87,000,000 or $0.94 a share.
This compares to $104,000,000 we posted last quarter, which was $1.11 per share. The annualized returns so far for the 9 months so far, our return on equity is 12.4% and return on assets of 109. Net interest income declined slightly to 195 from 198 last quarter, but it was up Compared to the Q3 of last year, which I think at that time it was $188,000,000 The net contracted to 2.33 from 2.37 mostly because of lower asset yields and less than expected commercial loan growth. Also, less PPP Impact this quarter versus last quarter was also a large reason for that contraction of NIM. Cost of deposits, as we've been telling you, has continues to come down.
We dropped to 20 basis points this quarter. It was 25 last quarter, so 5 basis points reduction in cost of deposits. On a spot basis, we were actually at 19 basis points. And I checked last night, we're down another basis points, about 18 basis points as of yesterday. So the story on the deposit side continues.
We also had Growth in deposits, especially DDA, non interest DDA grew by $324,000,000 Total deposits shrank, We did that very meaningfully. We're not trying to build the balance sheet. Growing the balance sheet and hanging things up in liquidity It does not really create value for anyone. Instead, this quarter, we decided not to build the balance sheet. We shrank it Free of capital and bought back stock Quite strongly.
In fact, one of the things the Board did yesterday when the bet is approved another $150,000,000 buyback Given that we are going to wind down the authorization that we have based on how we believe we bought stock this quarter. Also the fact that the stock was around $40 or so makes it very easy in my From my perspective, given where our book value is, we're trading at such a low multiple. It's so easy. It doesn't take Much of rocket science to figure out that it said goodbye. So we've been aggressive and we've been buying back and we've gone through much of the authorization.
Loans, total loans excluding P2P runoff, they grew by $74,000,000 The financial business remains strong as has been the case for the last several quarters. Commercial segments, the chaos outpaced Production on the production side, actually, we were pretty happy. Our production we tried to go back and said, okay, let's see what we were doing pre pandemic, As we compare the production this quarter to the Q3 of 2019, the production was actually higher this quarter. But it's Two things that we can't control, one being payoffs and the other line utilization, those have been disappointing this quarter, Which is why it all adds up to only about $74,000,000 of growth in the loan portfolio. What else?
Credit, I would say nothing but good news on the credit front. I know these days, Credit is not on people's mind. It should always be on everyone's mind. That's the primary risk we take as a bank. So I'm happy to report on the credit front, Criticized classified assets declined by $240,000,000 loans that are on temporary deferral or modified Under the CARES Act also declined to $285,000,000 They were $497,000,000 I believe at the end of last quarter, So almost cut in half.
NPL ratio also got better. It was 121 this quarter. Last quarter, it was 128. By the way, that includes the guarantee portion of the SBA loan. So if you exclude that, NPL ratio is actually 99 basis points.
The $69,000,000 large commercial loan that we spoke to you about last quarter, it's the resolution of that is moving forward. We're pretty happy With how we reserve for it and feel very comfortable in that level of reserve. Net charge offs annualized was 19 basis points Last year, I think we were at about 26 basis points. So good news on the net charge upfront as well. Capital book value has grown to $34.39 tangible is at $33.53 And of course, as of September 30, we had $58,000,000 left in the share buyback, We're adding another $150,000,000 to that.
And going forward, in terms of buybacks, again, we will remain Opportunistic given the volatility in the stock market, and we'll continue to execute on that. Before I hand this over to Tom, just let me say sort of what are the top things in my mind In terms of what we're trying to achieve in the short to medium term, basically loan growth, but not reaching for loan growth as in Getting caught up in that and going outside of a risk class, that's not acceptable. But loan growth restarting The growth engine on the left side of the balance sheet is a top priority. Continued improvement of deposits, While we've made a lot of progress on that, I think there's more work to be done there, especially in light of the fact that eventually rates will rise, Maybe 9 months, maybe less, maybe a little more, but away from a rising rate environment and we have to be ready for We're basically working on our deposit business to be able to do just that. In the very short term, it's returned to office safely is another priority and then launching in new markets.
The new markets that we talked about last time to you, we don't really have much to share yet because It's not getting ready for prime time, but we have been working for the last 3 months on finalizing. And hopefully, over the course of next We will make some announcements and launch 1 or 2 new markets. With that, I will turn it over to Tom, We'll get a little deeper into the numbers before Leslie then gets into the P and L.
Great, Raj. Thank you. So I wanted to spend a little time first on Deposits give you a little bit more detail and perspective on some of the things that we're working on and what we achieved in the quarter. So As Rod said, average non interest bearing deposits grew by $749,000,000 for the quarter And $2,700,000,000 compared to the Q3 of 2020. Period end non interest bearing DDA grew by $324,000,000 While total deposits shrank by $493,000,000 so we break down a little bit the $324,000,000 of NIDDA growth For the quarter, it was, again, broad spread across all geographies, across all business units I am very heavily focused on new client acquisition.
I'd also spend a little bit of time working on the Deposit portfolio, the work that Raj is talking about has been a daily level of Kind of bruising work that's not that glamorous, but we're working very hard on new account operating relationships, Cross selling within the book, ensuring that ECR rates are set at appropriate levels, Really working hard on kind of the building blocks of this. And I think the two places that you see it, Number 1 are the continued NIDDA growth, obviously, in the $324,000,000 but also secondarily, if you look at Service charges, deposit fees on accounts was up 33% for this quarter compared to the same period last year. So we're really starting to see excellent kind of cadence and rhythm in both Continued NIDDA growth, continued opening of new operating account business, which is really our central focus As a strategy and continuing sort of surging in the level of service charge revenue that we have from these accounts. So all of that It's a big part of what Raj talks about when we're talking about the entire deposit mix and the quality of the deposit book. A little further down, money market accounts declined by $1,100,000,000 this quarter as we continue to execute The strategy of the quality of the base, we have looked hard at accounts that we think are highly susceptible to increases In rates, once we get into a different interest rate environment and we've taken a lot of steps to ensure that we're moving out Deposit accounts right now on a proactive basis as we continue to grow the operating account business and take advantage of that entire dynamic To have just an overall better quality book.
Switching to the loan side, as Rod said, excluding PPP loans, total portfolio grew by $74,000,000 in the 3rd quarter. Residential continued to be strong, reflecting the strength of the housing market and the rate environment. The overall resi portfolio grew by $751,000,000 for the quarter. Of that, the EVO segment was $50,000,000 And the Pure Residential correspondent portfolio grew by $701,000,000 In the mortgage warehousing business, which has also benefited from a strong housing market, There we saw a decline of $141,000,000 for the quarter. Most of that is starting to see some normalization in this segment As refi activity begins to moderate, and we see a little bit lower line utilization in this area, although we continue to be And expect our commitment book to grow in the short term.
For the C and I business, it was up $13,000,000 for the quarter, including owner occupied CRE loans, and I'll talk a little bit more about what we see in that segment. The remaining commercial portfolio declined for the quarter. The largest decline was in Creek, Including multifamily, which was down by an aggregate of $317,000,000 for the quarter. The New York multifamily portfolio, which You have been following now with us for a number of years, declined by $76,000,000 for the quarter, but at this point, we believe that that's Stabilizing, that's the lowest level of runoff that we have seen in a number of quarters, and we're actually starting to see Some positives in the multifamily market in New York. I'm sure you all have followed that we're starting to see rent increases in the market.
We're starting See people return back to the New York City multifamily market. Schools are reopening and things are happening That are driving people returning to the city. There's been an awful lot of data out in the last couple of months about Rent levels even with concessions improving back to sort of pre pandemic levels, and we are looking at new Now in the multifamily space within the New York market. So we're feeling better. We're feeling good about the portfolio We have today at the current level that it's at, and we're feeling better about the short term growth opportunities within multifamily in New York.
I'd land a little bit more on Raj's comments about production. When we looked at production across The commercial lines, especially the C and I, CRE and small business areas, it was better than pre pandemic levels for the same We are seeing a reasonable return of pipeline, particularly in the C and I area where we have a large pipeline Heading into the Q4 and the Q1 of next year. So we're seeing clients investing more. We're still fighting through kind of low utilization rates. And even really the accounts that we're bringing on from an NIDDA perspective that have lines of credit with them, Even those lines are coming in at pretty low utilization rates, but we think ultimately that patience will pay off for us.
And As people start making more CapEx expenditures and growing more solidly in 2022, we believe these relationships, Including the existing ones we have, we'll start to see improvements in these areas. But actually, overall, production and pipeline build, We feel pretty optimistic about right now heading into the Q4 and heading into 2022.
Yes, line utilization bottomed out in the Q1. It started to improve all through the Q2. So we were pretty optimistic because we were seeing a very steady trend of Improvement. In the Q3, it really stagnated. So it hasn't gone down, but it really hasn't come beyond where it was in the Q2.
So And to John's point from the new business that we're writing, the line business, it comes on utilization levels, especially in that New business is very low, lower than its existing book as well. So it's all dry powder. So when These bottlenecks in the economy are resolved. This should create growth, but it's hard for me to say, is it going to happen a quarter From now, 2 quarters and 3 quarters from now, but that's sort of what we're seeing.
As for PPP, dollars 159,000,000 of the 1st draw PPP loans were forgiven in Q3. As of September 30, there was a total of $49,000,000 in PPP loans outstanding under the 1st draw program And $283,000,000 of outstanding under the 2nd draw program. We expect to open the forgiveness portal for the 2nd draw program next month, but obviously this is kind of winding down at this point. Quick update on deferrals and Care Act modifications. Slide 16 in the supplemental deck also provides more detail on this.
For commercial, no commercial loans were on short term deferral. As of September 30, dollars 244,000,000 of commercial loans remained on modified terms under the CARES Act Compared to $436,000,000 at June 30, the largest decline in loans modified under the CARES Act was $144,000,000 Decline in the hotel portfolio, particularly in Florida, continues to rebound. And if you've tried to get Hotel in certain areas of Florida, lately good luck, particularly in the Keys and other coastal properties. Just the occupancy has really returned Strongly there. So we're feeling good to see that change come about.
To date, $414,000,000 in commercial loans have rolled off modification. 100% of these loans have either paid off or resumed regular payments. From a residential perspective, Excluding the Ginnie Mae early buyout portfolio, dollars 40,000,000 of loans remained on short term deferral or have been modified under the longer term CARES Act prepayment plan at September 30. Of the $533,000,000 in residential loans that were granted an initial payment deferral, $493,000,000 or 92 percent have rolled off. Of those that have rolled off, 95% have been paid or making regular payments.
I think the last thing I'd say on the loan portfolio is also when we look at the $74,000,000 in growth, keep in mind that We had $175,000,000 of payoffs in criticizing classified Loans, so while it certainly impacted the loan growth number, it did contribute to the overall improvement in the credit quality And we're happy to see that. So with that, I'll turn it over to Leslie.
Great. Thanks, Tom. Give a little bit more detail on The numbers for the quarter, starting with the NIM. The NIM did decline this quarter to 2.33 from 2.37. The PPP fee recognition had a bigger impact on the NIM last quarter than it did this quarter.
If we factor out the impact of PPP fees and the impact of increasing prepayment speeds on some of our securities, the NIM actually would have been flat quarter over quarter. Loan growth was ready this quarter, not commercial. Had we seen more commercial growth as opposed to residential growth, we likely would have seen some uptick in The yield on loans decreased to 3.45 from 3.59 last quarter, recognition of PPP fees, The differential in that quarter over quarter, if it hadn't been for that, the yield on loans would have declined by only 6 basis points for the quarter. Most of that 6 basis points really was attributable to the shift from residential to from commercial to residential, sorry. Eventually, obviously, we believe that pendulum will swing back the other way.
I know you're going to ask me, so I'll answer you now. There's still $8,100,000 worth of deferred Fees on PPP loans remaining to be recognized. Almost all of that $8,000,000 relates to the 2nd draw program. So I don't really think we'll see much of that in the 4th quarter. Yield on securities declined from $156,000,000 to $149,000,000 and accelerated Prepayments, which we think someday has to come to an end, but keeps not coming to an end.
It just keeps getting faster on mortgage backed securities Total cost of deposits declined by 5 basis points quarter over quarter, The cost of interest bearing deposits down 6 basis points. And our best expectation right now is that NIM would remain relatively stable over the 4th But obviously, there are things that contribute to that that are a little bit difficult for us to predict, but that's our best expectation as of now.
And we can comfortably say the cost of deposits will continue to drop for at least 2 more quarters?
Yes. With respect to the allowance and the provision, overall, the provision for credit losses for the quarter was a recovery of $11,800,000 Slides 9 through 11 of our deck provide further details on the ACL. The ACL declined from 77 basis points to 70 basis points over the course of the quarter. Most significant drivers of that change, A $2,300,000 decrease related to the economic forecast. This is becoming less impactful than it has been in prior quarters, which is not Surprising as things start to stabilize, a $4,500,000 decrease due to charge offs, another 3.7 Due to a variety of changes in the portfolio, including the mix of new production and exits, the further shift to loan segments with lower expected loss rates, primarily residential, impact on PDs of improving borrower financial performance, risk rating changes, etcetera, And a $5,900,000 decrease in the amount of qualitative overlays, and this is mainly just to shift things that are now being captured by the models.
This Last quarter, we didn't think the models were adequately capturing. The largest component of the reduction in the reserve was The CRE portfolio, the CRE model is particularly sensitive to unemployment, which improved this quarter. And the commercial property forecast also improved, particularly for retail and multifamily where we saw improving forecasted vacancy rates. There was also a reduction in criticized Classified pre loans, which impacts the reserve. We also saw the resi reserve come down.
This was caused by residential loans continuing to come off And changes in the economic forecast related to unemployment and long term interest rates also had an impact. I'll remind you that almost 25% of the resi book is government insured and actually carries no reserve. C and I reserves actually ticked up a little bit as a percentage of loans this quarter. With respect to risk rating migration, if you see you can see some details on this in Slides 23 through 25 of our debt total criticized and classified commercial loans declined by $240,000,000 this quarter. Most of that was in Total non performing loans decreased to $277,000,000 this quarter from $293,000,000 at June 30.
The declines in criticized and classified assets really occur across pretty much all portfolio of segments with the largest decline in CRE. Looking at other income and expense, there's not really anything material to call out this quarter. On a year to date basis, we had initially guided to mid single digit And that still looks like where we're likely going to land by the end of the year. And I would also note the 33% year over year increase ETR was a little lower this quarter, mainly due to a temporary reduction in the Florida tax rate. Last point I'll make, you'll see in the next Couple of weeks, we'll be filing an S-three, a shelf registration.
We don't read anything into that. So you all don't feel like you need to call me. Our shelf registration is expiring, and we just want to have An active shelf on file, we're not planning anything, so but you'll see that. And I'll turn it back over to Raj for any closing remarks.
No, I'll turn it over for Q and A. Okay. Let's jump into
Now first question coming from the line of Ben Gurland with Hovde Group. Your line is open.
Hi, good morning everyone.
Good morning, Ben.
I was
wondering if we could start on loan growth in general. It was great color and commentary from the opening remarks. I was curious if you guys could take a minute to kind of just walk through the competitive aspects of the markets you're working in. It seems like Some competitors are doing a little bit stronger loan growth, but kind of just backing into the math, they're probably doing at a lower rate. So with the payoffs you're seeing in the line utilization somewhat flat tilling recently, are there areas of Kind of low hanging fruit that we should expect to see in terms of growth and kind of the dynamics you're working through?
And then any update on The potential lift outs in more granularity would be helpful.
Sure.
In terms of production, as Saab said, if you just look at gross production levels, we were pretty happy with where the quarter came out. The only place where we're not active and They deliberately pulled back our areas that are still impacted by the pandemic. So we're still not, for example, Leading into hospitality or areas such as, even office on the CRE front. But everything else, Small business, corporate, commercial business and other aspects of CRE, warehouse, industrial, multifamily. We are Seeing pretty decent production, but we're seeing enormous amount of payoffs.
It just doesn't end. So I think all of that adds up to the numbers that you see. Where we're seeing inordinate competition from a rate and Structure, I would say it's LIFOs that are doing very long dated IOs, Going out 10 15 years that we refuse to compete in that space. That has It's always been out there, but I think it's gotten very pronounced in the last few months. Very long dated 10, 15 year paper, ipris only, and I just don't think that fits our risk appetite.
Yes, I would probably add when we use the word payoff, I would spend a little bit of time talking about what Payoffs mean and largely payoffs for us are not clients that are leaving to go to a different bank. There are clients that are selling their companies, particularly within the C and I book. I mean, the level of M and A activity Right now is just incredibly strong and it's not only deep in larger businesses. Typically, A couple of years ago, you would not see significant M and A activity in kind of your commercial lending businesses. In commercial, I would describe as Kind of a $10,000,000 to $50,000,000 sales company, we see significant activity M and A wise even in that segment.
So The private equity push has been very significant in terms of what it means within our portfolio and how it's increased. Steve, Raj is completely accurate on what we're seeing in the real estate space as it relates Lifeco's and debt funds and others, CMBS, the agencies coming in at The terms and conditions and fixed rates and debt yields that are just really not bank deals. I mean, these are Deals for different kinds of companies that have different cost of funding and stability streams of funding to be able to support that. There's not in the markets that we're in, I wouldn't say there's any low hanging fruit. We're in competitive places, And it's sort of a daily fight to do well.
There are certain aspects that we're trying to Focus on a little bit more going forward certain spaces that we see. We have added a fair number of producers In the last quarter, we have several offers out this quarter. And so reinforcing our teams, Both in the markets that we're in and then the expansion markets that we're thinking about is a big part of the strategy.
Okay. That's helpful color. I appreciate that. And then, Raj, just thinking Kind of bigger picture. Now I would consider you to be kind of a top tier steward of capital, great leadership you're taking for the longer term.
So Everything you said of the strong production, payoffs are going to come and go, but they're really a little bit out of control of the bank. You seem to have a pretty good handle on credit and your margin is and
that's the sensitivity should be A
little bit helpful as rates do increase. So given where the stock is today, Why not do something more aggressive in terms of a share repurchase? I understand that you did a pretty sizable one in the 3rd quarter, but What's preventing kind of making hay when this sums up in terms of the current valuation today of doing something more aggressive potentially even in touch?
Yes. I mean, we don't have the exact numbers in front of me, but give or take $150,000,000 which is 5% of our Capital we bought back in less than a quarter. So I'd say we were fairly aggressive. The quarter before that stock was at an all time high And we sat that one out, plus we were also trying to see will loan growth come back or not. So our philosophy on stock buybacks before the pandemic used to be, we'll just do a little bit every day.
We're not going to worry about exactly what the stock price is. This year has been a little different. We have been more opportunistic, more leaning into it when stock is lower and backing away when Because I just see a lot of volatility even now for the next several months. I think there will be ups and downs. Nothing to do with us, just the market, right?
One piece of bad news from Doctor. Fauci or from somebody else, and you can have big movements in the stock market. We will use that to our advantage. We're doing we're authorizing another $150,000,000 in between those two acquisitions and what we started the year with, which was another but Roughly $40,000,000 That's a lot of stock in a year and we'll keep doing more. And it's not like we're Going to the balance sheet, you saw balance sheet shrink $400,000,000 this quarter.
So until we see Yes, line utilization come back and grows squarely in front of us. This we'll continue on the strategy. We have We have a fairly good amount of room here, given our capital position, which is so strong. Okay, great. I appreciate.
I'll stop back in the queue. Somebody just waved to me and said that it's
Our next question coming from the line of Dave Rochester with Compass Point. Your line is open.
Hey, good morning guys.
Hey, David.
Back on the buyback topic, you just mentioned Raj, you'll Keep doing more beyond this buyback. I was just curious as you're looking at your excess capital position, how much do you think you've got in excess because you'll be growing loans hopefully faster next year. Just curious how you're thinking about that.
Dave, we're kind of in the thick of our capital planning process for next year right now, and I'm going to defer providing specific guidance around that, I think, until our next Call. I don't want to throw numbers out there preliminarily while we're in the thick of that process. But you're right, we do appreciate the fact that There's a lot of capital and there's room to go. Yes.
Now I guess just given where the stock is and I think you already mentioned If we're in the low 40s for at least a good part of the quarter, maybe not that long, but it would seem like you would continue Not necessarily aggressive, but being active in the buyback. Yes.
Is that fair assumption?
Yes. If the stock stays where it was, it has been for the last 3 months, we will continue to buy. Yes. If it goes up to $51 like it was the previous quarter, we'll probably pull back a little. So we'll just We've created a little bit, yes.
Yes. That all makes sense.
Okay. And then maybe switching to loans, it was good to see Some net growth there ex the PPP and it sounded like you're done on the New York City multifamily runoff going forward. And you mentioned some positive dynamics there. Are you guys thinking Maybe you could see some growth in that book here or are you thinking that just stabilizes? And then can you just give an update on some of the other areas where you've mentioned Run off expectations, I know you've seen some runoff on Bridge for a while.
Are you good on that in the next quarter or so? Or do you think that runoff looks into the
Yes, let me take each piece of that. So I think we're Good at where we are in the New York multifamily portfolio right now. We're encouraged by the underlying trends With people coming back to the city, especially coming back into free market Tyke Property, we have pipeline for that product in Q4. So we're expecting to do new loans in that segment in the 4th quarter. So I would expect that it will stabilize and there's a better outlook For that asset class and that geography over the course of the next couple of quarters.
As it relates to Rich, I would I'd break into 2 separate components. 1 would be the equipment finance business and obviously the second would be So the franchise business was part of our fairly significant focus On asset improvement, we did see franchise some parts of the franchise business, particularly fitness went through some real challenges In the COVID process, we did reduce the portfolio within fitness reasonably significantly, and we probably will Continue to do that, especially in one concept, but the numbers at this point aren't as large as they were When we first went into it, we've actually done some new franchise lending in the last 90 days. We're centering Our strategy around what we think are the higher performing concepts, better delivery models, better pickup models in that segment, and we did actually fairly large loan this quarter. We funded it in that segment. So we do see opportunities within the franchise segment.
I think the Within the Equipment Finance segment, it's a bit more challenging. I don't see as much runoff going forward, but it's When you look at that segment, the competition within the leasing business is extremely robust for CapEx schedules and it's difficult. We saw some investment grade opportunities this week for 7 year fixed rate loans at 1% The market gobbled up. So while the credit was certainly good, we took a pass. I mean, we just don't See a great risk reward return in that segment right now and given where the interest rate scenario is.
One of the things that we're trying to be careful about is buying into very long term fixed rate loans At a very low level now, they could come back to bite us as rates grow up as rates head up. So the equipment finance business, I'd be a bit less optimistic in simply because just the return dynamics are not very good in that business.
Yes. Okay. I appreciate all the color there. Maybe switching to deposits real quick. As you're trying to figure out What's maybe hotter money and what's not?
How much more do you think you have to run off or do you want to move out at this point? And when do you think you'll get back to growing the book again?
Listen, I define growth in the book as growth in DDA, not Total deposits. So when I this quarter, we had total deposits declined $493,000,000 but I don't think that is an issue at all. That doesn't drive profitability. DDA grew $324,000,000 on average DDA actually We grew a lot more because
what was it, dollars 749. $749,000,000
So we're growing deposits that matter. It's hard for me to give you a number on what we want to chase out, but there is still There are some large, depositors. We also want to lower the average ticket size of the relationship. So a lot of the growth that we're focusing on and we're paying our people for is really smaller ticket growth. That doesn't create big numbers quarter over quarter, but it creates longer term value that's far more important For us, Dan, just large $30,000,000 $40,000,000 $50,000,000 accounts.
So I'll take more Consistent slow growth that will stick with the bank for 10 20 years, then take big quick growth that will that won't. So what you're seeing is that internal change in the deposit portfolio. It's hard to tell that from the outside, but inside we're focused Laser focus on that, bringing down and not paying bringing down average relationship size, Deeper cross sell paying more for more cross sold accounts. So even within DVA, there's a difference between DBA, relationship 1 and relationship 2, and we're distinguishing that and we're paying people differently. So It's like I said, on a surplus, it looks our job is done.
We're at 33% DDA to total deposits and cost of funds down in the teens. But I know that internally we still have more work to do. It may not change those ratios that much. It may not even move the cost of funds down that much, but it will improve the deposit franchise for the long
Our next question coming from the line of Steven Alexopoulos with JPMorgan. Your line is open.
Let's go to the next caller.
Our next question coming from the line of Brady Gailey with KBW. Your line is open.
Hey, thanks. Good morning, guys.
Hey, Brady. Good morning.
Good morning, Brady.
Another one on loan growth, not necessarily near term, but Raj, when you look at BankUnited, when you look at the markets you're in, especially there in Florida, over the next 3 or 4 years or kind of longer What do you think is an appropriate growth rate to consider for BankUnited?
I think if you look backwards in our history, there was a time when we were growing 25%, 28% I don't think we ever returned to that level. I don't think that's appropriate for a lending institution to grow. But at the same time, if I look at So what is a 70% level of growth? It probably is low double digits, Give or take 10%, that would be an appropriate level, but that's generally made up of lots of highs and lows Because there is no normal in any one time, right? We're living through a weird time right now, and we may be living through something very different a year from now.
But if you were to just for modeling purposes, long term, think about it, I would say that feels kind of right and 11%, 12% Both balance sheet, left side and right side of the balance sheet. But that is a very That is an approximation and an average of what can be a lot of lows and highs.
All right. And then Raj, I know you guys are not ready to talk about any new markets that you're expanding into. Look, can you just help us think about how big of a splash that's going to be? Like when you go into a new market, Will it be notably EPS dilutive with an earn back of a year or 2? Or how big of a splash do you think you're going to make When you do decide which markets to go into.
Brady, we've entered new markets in the past. New York was sort of the exception because it was just But when we entered Orlando or Jacksonville or even some of the newer businesses, definitely not be a new market, but when we did Pinnacle or we did The warehouse business, so if I pick any one of them, I don't think it materially impacts the bottom line for the 1st 12 months, Up or down. But because we don't try to jump in and start doing 100 of 1,000,000 of dollars right off the bat, We take a more measured approach at least for the 1st full year because usually the team is new, You're trying to build they're building 2 year culture. You're trying to get comfortable with them, and they're trying to get comfortable with you. And Generally, we go through 1 whole year cycle before we start to put it into a higher tier.
So in 3 or 4 years, it will definitely be meaningful to the bottom line, but in 12 months, it's not. So these are we never had the Rent strategy or anything. It's always been make some investments. Some of them will pan out, some won't. And but we We also don't want to do anything which will just be a distraction for the long term and never really add anything to the bottom line.
There are ideas like that, that come up, We should be swat away because we don't want to get distracted by something in 5 years, it will be $300,000,000 That's also a waste of our time and resources. But anything we do, the goal will be that over time, it will be successfully measured in 1,000,000,000 of dollars, but not in the 1st 12 months.
All right. That's fair. And then the last question for me is on the PPP fees recognized in the quarter. I think I think last quarter it was $4,000,000 it was $4,000,000 I think this quarter you said it was down a little bit. What was the amount of fees recognized?
It was less than $1,000,000 Brady, I think around $800,000
Okay.
Yes. All right.
Great. Thank you, guys.
Thanks, British.
Our next question coming from the line of David Bishop with Seaport Research. Your line is open.
Yes, good morning. Hey, a
quick question with the build in
the residential mortgage this quarter, Just curious if that had a material effect or what you expect to have a material effect in terms of your interest rate risk The positioning moving forward, just curious if that had much of an impact.
No, not really, Brady. The balance sheet remains moderately asset sensitive. We hedged it at the top of the house and so it really isn't going to have a material impact on the interest rate risk position.
Remind us in terms of loan floors, just curious what we might have to see from a movement from the Fed to penetrate or
No. Again, I don't think so. Especially now with the movement from the Fed, I don't think you'll see a material impact from floors initially.
Got it. And then a housekeeping question.
The biggest business where we have floors that are operating today is in the warehouse business. So It's not going to be that big of a thing.
Got it. And Leslie, how should we think about the effective tax rate? You said there's some noise this quarter. Maybe how that pans out into Q4 in 2022?
Yes. I mean, it will be down
a little bit in the Q4 and the main driver of that is probably more down around the 24% level and the main driver of that is just that the Florida tax rate Florida just enacted a law that reduced the 2021 tax rate to just a little over 3 And then it goes back to normal in 2022. So I guess we'll take it while we get it. But that's the main reason.
Got it.
Remind me And what's the normal rate for 2022?
5.5.
Great. Thank you.
Our next question coming from the line of Jared Shaw with Wells Fargo. Your line is open.
Hi, good morning. This is Timur Braziler filling in for Jared. If we could just circle back again on the loan growth, I'm just wondering how much visibility is there to the level of Future pay down activity or M and A activity in the space. And then when you combine that with the low utilization rates, I guess, are we close to reaching an inflection point of kind of both of those stabilize and how meaningful could that inflection point be?
So I'll answer them separately. When it comes to line utilization, we have almost no visibility. People don't give us a heads up when they are going to draw on the line or pay down a line. We often find out the same day or the day before. On M and A activity and payoffs happening for those reasons, we have maybe a month's worth of view.
But it's not like we know a quarter out or 2 quarters out, somebody is going to sell to a company or a building. We'll only find out when it's the payoff is maybe 3 weeks away or 4 weeks away. Production, we obviously have a much better handle on. We know what the pipeline is. With a fair amount of certainty, we know what we're closing this quarter and we even know A decent amount for next quarter.
There's always fallout that happens, things get delayed and all that stuff, but we have enough Practice over the years to know what percent will actually pipeline will close and what will just fizzle away, what will slip. That we feel pretty good about. Payoffs and blind utilization is much harder.
Okay. And maybe asking the payoff question in a different way. Is much of that or do you get a sense that any of that is kind of pent up activity from what didn't happen in 2020? Or are we in a new normalized level where we should just expect there to be more M and A activity moving down kind of on market cap?
I think cost of capital has come down for everyone. That's what is driving it. It's a lot of money. People have to borrow at very low rates and So cheap money will fuel M and A. That's not an issue.
Yes. I would say in many cases, even our Clients that are purchased in M and A transactions, they themselves do not have visibility into it because they were not running a show. Many of these are unsolicited efforts by private equity to get into this space. I mean, normally, if somebody is actually Going to put the company up for sale and run a process, we tend to know that a little bit more in advance that many of these are Unsolicited moves by private equity to enter into certain industry segments with certain companies, and they kind of come out of the blue.
Okay, understood. And then just if I could just one more follow-up on deposits, some of the mix shift there on the interest bearing side. The movement out of the savings and money market accounts and the slight uptick in time deposits, Are you trying to capture some duration? Are you getting any customers Most of
these things are really unrelated.
Okay.
The take up in time It's not like the money shifted from directly the money market bucket to the time deposit bucket. Those two things are actually unrelated. What comes in and time deposits kind of comes We're not really making a push in that space. The money market runoff was as Raj and Tom described to you earlier, and we're just reducing Our exposure to some of these large accounts that we think may be price sensitive in a rising rate environment. So we think there's a relationship between the two things.
Understood. Thank you. But not a direct one anyway.
Yes. CDs are still priced between 10 20 basis
Yes. In each quarter, obviously, we have runoff of what was a CD book that is maturing and we have that This quarter
and we'll see improvement. It did tick up a little bit this quarter, but I don't think that was anything where we were out campaigning or advertising or anything like that.
Our next question coming from the line of Christopher Marinac with Janney Montgomery Scott. Your line is open.
Hey, thanks. Good morning. I want to follow-up on technology, Raj, from a broader perspective. I mean, how do you feel your position now for your digital build out? What is left Do you still think that you have what you need for the next 5 years for BankUnited?
Yes. So I've spoken about this At length, a lot of investor meetings. I think you'll never be done in technology. That's sort of the sea change in technology. I grew up in that mentality of do we have enough to get to $50,000,000,000 or $70,000,000,000 or whatever?
Do we have enough We have to do more spend. I don't think we can think of technology in those terms anymore. I think it is a constant spend because it is evolving Faster. And I don't actually think of that as a negative thing. I think technology is what is driving business now.
So the more you spend on technology, it's almost like we used to think about producers. You spend on producers to grow business. You never ever thought Twice about spending on producers is a bad thing. I think it's the same with technology. It should enable business, it should enable Solving customer pain points, when you go find them and you can solve them, you can create an edge for yourself in the marketplace and you can capture market share.
That's really the transformation that we've actually gone through over the last 4 or 5 years. So to your question over the next 5 years, We know what we're spending on over the next 12 or 18 months. Those projects are on the fly, but there will be more stuff that will come after that, Which we may not have identified today, but there will be budget that will be put in place and we will find new niches and new customer pain points to solve And develop solutions for them and then go sell them and get earn market share. So it is a big cultural change inside of And we are working heavily on commercial payments hub is what we call that. That's our big spend over the next 12 months or so, which hopefully by this time next year we will be live.
But I'm sure there'll be some things which will go beyond that.
Great. Thanks for that. And I guess from your perspective, your competitive position is still as good as ever, if not better as a result of What you've invested in?
Yes, absolutely. It is 4, 5 years ago that we were doing a little bit of catch up, But once we actually went on to the cloud, invested in the platforms that we have, I feel pretty good about where we are today. I never want to get complacent and say we're done. Now we can actually just chill and have the IT team take a breather. There'll be no breather.
All the stuff that you will be working on. And I'm asking the front end of our company to work closely with the IT people. All we do is sell our balance sheet. If we just buy and sell money, that is such a commoditized Business, if you are not going to make an outsized return on capital, you really have to start with defining a customer problem And then finding a solution that is unique and proprietary, solving it for that customer and then going out and finding 10 other customers like that and trying to sell it. That really is the Like that and trying to sell it.
That really is the heart of what we're trying to achieve medium to long term. That's a lot of the success you see in the deposit portfolio and some of the lending business we're doing. Yes, at the end of the day, of course, we make our money by spread income. We want people to take loans from us and put deposits with us, but they shouldn't do that just because we have the best price. They should do it because we're solving a problem for them.
And a large part of the deposit success we've had is actually that products we invested in about 3 or 4 years ago. We don't advertise that too loudly for competitive reasons, As you can fully appreciate, but that's really what it boils down to. In some ways, that's what fintechs are doing, if you think about it, They take a customer problem and they go and solve it. It's a very narrowly defined customer problem, but then they solve it really well, and they earn Good economic rents for solving that. And we're trying to do the same thing more on the commercial space.
Great, Ross. Thank you very much for the background. Appreciate all the information this morning.
Thank you.
Our next question coming from the line of Samuel Bargo with Stephens Inc. Your line is open.
Good morning. This is Samuel Bargo on from Brody Preston.
Good morning.
I wanted to go back just for a moment to loan growth and Returning to the residential and consumer portfolio where you had a pretty substantial uptick here. And I understand that $50,000,000 of that is I wanted to ask where the additional $700,000,000 of growth came from?
Just our regular jumbo correspondent portfolio.
It's hard to have pretty smooth growth. I think if you go quarter over quarter, you'll see it up and down a lot. This quarter was high, but I don't think it was that high in the couple of quarters before that.
But that's really that additional growth. I know you see the title residential and other consumer, but the other consumer portion of that So insignificant that I keep asking people, can I just take that out of the title and they keep telling me no because it's in there? It's all residential We're almost all residential and the big chunk of the growth for this quarter was in our jumbo portfolio.
Understood. Thank you. That's very helpful. And then just turning to yields a little bit. Could you give some additional color on the And the delta between the roll on and roll off rates?
So I don't have the roll off rates in front of me. The roll on rates in the residential book are running 2.45 to 2.50 and then the commercial book a little below 3 right now.
Great. And then On the securities book, what sort of rates are rolling on these days?
Over for the quarter, it averaged 120.
Awesome. And then I guess my last question would be, if you could just give a sense for the effective duration Of that securities book currently?
The configuration of it? None of the duration. Of the duration.
About the same.
It's about 160. It's sub-two and it's been consistent for a long time, but about 160.
Great. Thank you very much. That would be all for me today.
Thanks. Great. Thank you.
Our next question coming from the line of Steven Alexopoulos with JPMorgan. Your line is open.
Hey, can you guys hear me?
There you are. Good morning. There we go.
Good morning. Raj, I wanted to ask this question. So other banks are seeing elevated payoffs too, but they're also seeing stronger commitment growth. It looks like your commitments were up by less than 2% in the quarter and even what you went through with the Delta variant, the impact basically I would have thought those commitments would have picked up. Do you have any color there?
Which commitments specifically?
Commercial, commercial commitments.
I don't think we've actually disclosed that number.
You have mine. Well, I guess
that's part of the deck, yes.
It's in the deck, Leslie.
Yes. That doesn't include the pipeline though, Stephen. That's the commitments on the existing book that you're seeing in there.
Right. But as other banks are calling that out, they're seeing 5 percentage growth quarter over quarter. I think you guys are 1.5%. And just given Florida's Fairly open economy. Like what are you hearing from your customers?
Are they not as optimistic on the prospects for their growth? It's just surprising that you're not seeing stronger commitment growth here.
Yes. I wouldn't necessarily say they're not as Optimistic is what they see for the future in terms of the business. Some of that It's hard to answer that in a real granular way without sort of having deep insight into what everybody else's Book looks like some of it can be mix of business.
Actually a lot of that is mix of business. We're not in some of the For example, the capital call line business, which you were discussing actually just before this call, we're not a big player in that business. That has seen a significant amount of growth. All the private equity discussion that we've had on this call, how active private equity has gone, we think about what businesses would Benefit from private equity growing so much, it would be a capital haul line business, which we're not in any meaningful way. So I think it's a mix of business.
Our lines tend The formula based lines against inventory and receivables, while inventories are struggling for all the reasons we read about every day in the paper. And shelves are not stocked. And if shelves aren't going to get stocked and receivables aren't going to grow, We are going to lag with that. So I think it has probably got to do with the kind of line business we do versus some of our competitors,
Okay. Yes. I want to probably also add, Stephen, that as we think about the sales team that we have and what we're asking them To do the deposit growth, the TM growth and other things are a very center part of what we're asking people To spend a great deal of time on, loan growth obviously is a piece of that. But When we look at the attractiveness overall of a potential client, it isn't just a commitment size Number that's attractive to us. It's kind of a full banking relationship kind of number.
And so we're not As solely focused on commitment as being the predominant driver of where we put Sales effort as much as we are that's an important component, but as much as we are, will this drive NIDDA growth? Will we get Operating a TM business out of it and that is this a long term client for the organization that we find attractive.
Okay. That's good color. I wanted to ask, so residential was strong this quarter on the loan growth side. Were you guys just more opportunistic given C and I coming in a bit light or should we expect strong growth in resi to continue?
I actually looking at Pipeline for resi right now, I don't think it will be a repeat of this quarter. I think a few things fell into place. Some of it was actually just Things have rolled off from the previous quarter into this quarter. So, I think this was an outsized quarter for resi. I don't Okay.
Thanks. And then finally, if I could squeeze one more in. Leslie, on the other fee income line, what's
So, Steve, that's a kitchen sink line, I guess, is the best way to There's just a lot of things in there that could be up or down in any given quarter. I don't think there's anything going on in there that I would call a trend. A couple of the things that happened this quarter, we actually had a negative mark on our commercial servicing rights, which in the overall scheme of things are very immaterial and Out of the SBA portfolio, there was a negative mark on some of our BOLI this quarter. It's just kind of miscellaneous episodic things, none of which I think are indicative of any kind of trend.
Okay. But is this level a decent run rate we should assume?
Actually, no, probably a little higher actually is a better run rate. I think we had Couple of negative things that went through there this quarter that I think were kind of not normal.
Okay.
Okay, great. Thanks for taking my questions.
Thank you.
I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Roachsink for any closing remarks.
Thank you very much for joining us, and we'll talk to you soon. Thank you. Stay safe everyone.
Bye everyone.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your conference for