BankUnited, Inc. (BKU) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to BankUnited Fourth Quarter and Fiscal Year 2024 Earnings Call. [Operator Instructions] 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.

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 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 statements, whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 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.

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. 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've 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 #6. 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 6 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 5 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 the fourth quarter of 2023. Our EPS grew from -- fourth quarter of '23 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 '23, was at 2.60%, actually went down a little bit to 2.57%, that's a seasonal adjustment. Went up to 2.72% to 2.78% to 2.84%. That's what we are 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 if -- 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 3 or 4 things. And 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 we talked to you about this time last year. So 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 turn to Leslie and say, "Please, could you pull up your EPS estimates for us? What are the -- what is the consensus." And I think yesterday, she told me the consensus was $0.73. So I'm happy that we're significantly above where the consensus was. And $0.91 is better than the $0.81 we reported last quarter. So great progress over the quarter as well. Now the place where we really outperformed even to our own expectations from 3 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 6 basis points higher at 2.84% from 2.78% last quarter. And that's mostly because on the deposit side, we did much better than we thought we would. Fourth quarter is a seasonally difficult quarter because of certain of our businesses to 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 from to 2.72% from 3.06% last quarter. Cost of interest-bearing deposits actually came down 45 basis points to 3.75%. It was 4.20% last quarter. And on a spot basis, also, we came down to 2.63% from 2.93%. Now despite all the seasonal headwinds that I just mentioned in some of our businesses, average NIDDA, instead of going down, it actually went up, it was up $173 million, which is what feeds into the better-than-expected margin story here. And that just to shout out to all our business lines who contributed to that. So a number of them are on the line. Our ending NIDDA was basically flat, was declined only by $19 million. So 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 noncore portfolios like leasing and franchise finance. So if I look back over the year, NIDDA grew -- so noninterest DDA grew by $781 million for the year. Total deposits grew by $1.3 billion, and nonbrokered 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 noncore 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, that, 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 1 office loan, but we've seen that coming for a while, and we are properly reserved for it. Capital. 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, at the 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 NIDDA would grow double digits, we grew at 11.4%. We said -- total deposits grow mid-single digits, we grew at 5%. We said nonbrokered total deposits grow slightly more. And yes, they did, we grew at 7%. We also said that we would pay down -- 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 2s by the fourth quarter, we ended up at 2.84%. 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 loans will be -- 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 payoff 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 deja 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 on the left side and the right of the balance sheet to improve our metrics. Number one priority has been and will continue to be growth in NIDDA, that is the most important driver for us achieving what we want to. NIDDA, 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 noncore 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 -- it's hard to say exactly when it will happen, but it will 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 6 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 in the second half. And loans are generally the second, third and fourth quarter, first quarter being a difficult one to underwrite new business given the end of the year. But other than that, am I missing anything, Leslie? Tom? I'll turn it over to you, Tom.

Okay. Yes. 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. Well, 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 for 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 in growth opportunities for 2025. A few minutes on CRE. I 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 while we had good growth, we still have a modest -- moderate CRE portfolio. Comparatively based on September 30, 2024 call report data, the medium level of CRE loans to total loans for banks in the $10 billion to $100 billion bank range was 35% and the medium ratio of accretive 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 31, the weighted average LTV to 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 roll-offs and even a little bit in the last quarter in terms of shortening of abatements on new leases. There's -- 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 9,000x analytically. And I think at this point, you did see one tick up in a nonperforming 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 the 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 loss content over a period of time, we think it will 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 31. 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 were 65% and the weighted average debt service coverage ratio was 1.57 at December 31. 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 1 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 in a number of our submarkets. 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 4 loans. While the exact amount of the ultimate loss content is obviously still to be determined, we see it pretty manageable. As Raj mentioned, we had 1 nonperforming CRE loan increase by $25 million this quarter. It's related to 1 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 getting into 2025. We are a bit seasonal. We do expect to see really nice growth in the first 2 quarters. Strong relationship, strong pipelines, new account activity was 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 getting into 2025. So with that, I would turn it over to Leslie.

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 assessment, 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 2.84% from 2.78% last quarter. We guided to NIM being flat for the quarter, and as Raj mentioned, average NIDDA 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 4.20% to 3.75%, while the average cost of total deposits declined from 3.06% to 2.72% and the spot rate from -- to 2.63% from 2.93%. As you'd expect, the average yield on loans declined from 5.87% to 5.60% and the average yield on securities declined from 5.62% to 5.31%. 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 noninterest-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 is some seasonality in the business. Generally, we -- 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 3 to 4 basis points of pressure resulting from the roll-off of some hedges. But we do expect to see that 3% by the end of the year. So I would -- to summarize all of that, I'd say don't get so focused on individual quarters, but 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 0.94% to 0.92%. The reserve was 82 basis points at the start of the year. At the end of the year, the commercial ACL ratio was 1.37% and the reserve on CRE office was 2.30%. The main reason for the decline in the ACL this quarter was net charge-offs, that's how it's supposed to work. We 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 3 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 is 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 will likely continue to move toward that 1% level. Noninterest income and expense, nothing really to call out for the quarter that's material in terms of noninterest 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 L.A. 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 loss content. With that, I'm going to turn it over to Raj for any closing remarks he has today.

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 is 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 the 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 of 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. Second, I would say that there is more competition today than a year ago. A year ago, competition really, respective the lending side, eased off after the Silicon Valley crisis. And we saw a widening of spreads starting in summer of '23. And I would say for the last 6 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 talk to us about how they can magically make our margin better and our earnings could 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 improvements you see is just good old blocking and tackling and improving the balance sheet 1 asset and 1 liability at a time. So with that, I will stop, and I'll turn it over for questions.

[Operator Instructions] Our first question is going to come from the line of Woody Lay with KBW.

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 -- it grew in the 4% to 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?

Yes. 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.

Yes. 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?

So demand deposit growth is not -- 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 6 months. But in the first 6 months where we do a lot of our growth, I feel pretty decent about that guidance. If there is a lot of competition that certainly 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 have 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 nonrelationship business. A year ago, nobody was doing nonrelationship 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 '21, '22, where we would love to have -- 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.

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 noncore commercial portfolios as well as from deposit growth.

Right. Yes, that's great color. And then just last for me, looking sort of at the asset base 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?

I think wholesale borrowings, while we paid down a lot, I don't think we can pay down that much going forward. There'll be some -- a 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-digit growth. It will be up a little bit. So it will be -- FHLB paydown story is coming to an end. Yes.

[Operator Instructions] Our next question is going to come from the line of Ben Gerlinger with Citi.

So I know you guys have made a lot of initiatives in the past couple of years for noninterest-bearing deposit. Leslie, here's your soapbox to stand on. I know the title is a big component and has grown. There's a seasonality to it. Is there any other ones that you wanted to highlight, when you think just 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 quarters here? I know that you have the tailwinds, but just kind of -- what's the momentum looking like over the next 180 days?

Well, 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.

Okay. That's helpful. And then just 2 just kind of cleanup questions. Leslie, I know you said margin could be down. I think you said down 4 basis points in 1Q? Or are you just highlighting the specific...

Yes, that -- yes, let me clarify that. I didn't say margin would be down 4 basis points in 1Q. I said that margin expansion would be -- would take place over the course of 2025, would be more challenged in 1Q because there will be 3 to 4 basis points of pressure from the roll-off of hedges, but that doesn't translate to margin being down 3 to 4 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.

Got you. Yes, makes sense. I thought it was just -- like I said, it's a higher hurdle for 1Q, but yes.

Yes, correct. That's correct.

And then you said expenses -- and you're not going to try to pinpoint railcar, but is that mid-single inclusive of that?

Yes. Expenses, as reported, including the railcar costs, up mid-single digits on a GAAP basis year-over-year is what I guided.

[Operator Instructions] Our next question is going to come from the line of Timur Braziler with Wells Fargo.

Raj, last quarter, you had laid out ROA over 1%, return on equity, kind of 10% to 12%. NIB, we just talked about over 30% and taking a better part of next year to get there. I'm just wondering with the 4Q 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 '25 to get you over those hurdles?

Our guidance, we provide 1 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. It's still not 1%, so 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 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.

Got it. And then I appreciate all the color on the DDA transition or momentum there. But just maybe looking at 4Q 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 successful [indiscernible] a seasonally soft quarter?

Yes. No, we're not going to try to get that specific.

Yes. Yes. 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.

We really don't disclose results of that granular of a level by business line. Not going to, sorry.

Got it. And then just last for me. Leslie, you had mentioned on the loan side, the seasonality is kind of opposite of deposits were 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 talk more broadly as to environment?

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

Yes. 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.

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 nontraditional 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. We -- again, we focus predominantly -- those things will come and go. They're hard to predict. And some quarters, there is more. In 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 will even out.

[Operator Instructions] Our next question is going to come from the line of David Bishop with Hovde Group.

Curious, Leslie, maybe a 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?

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.

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?

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 inflect.

Any sense of what new production is coming on these days?

So yes, I have those numbers somewhere. Hang on, getting on that. I would say in the fourth quarter, commercial production averaged a little over [ 7.5 ], so between -- a little over [ 7.5 ] for the fourth quarter.

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 if you could quantify maybe segments or loan portfolios that are maybe impacted that could feel the impact of tariffs on the commercial side?

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.

Just way too soon, I think.

Yes.

[Operator Instructions] Our next question is going to come from the line of Stephen Scouten with Piper Sandler.

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. It sounds like the 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 in loan growth or balance sheet growth?

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

Got it. Perfect. Just wanted to clarify. And then around the noninterest-bearing deposit growth, maybe particularly around title on 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 that -- those inflows?

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

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...

The one is $25 million.

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?

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...

Well, we are -- we have a specific reserve on it.

Yes.

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

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

[Operator Instructions] Our next question is going to come from the line of Jon Arfstrom with RBC Capital Markets.

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

Oh, on the reserve, I thought you were going to stay 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. We have less, we'll get there a little slower.

And it's also dependent on what the economy move -- and that's...

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

Yes. 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 said you reserve for a lot of this, but do you have any thoughts on that?

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 off 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 2 basis points and then you can have another one at 25 basis points and go back to 4 basis points. It's all over the place because only 1 or 2 loans can swing that number a lot. So I think it's really important to look at a 12-month trailing 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 3 loans. And next quarter, it could be 0, it could be 1, it could be 2. You will have some losses. But measuring any 1 quarter and extrapolating from that can be dangerous. So I'd say look at 4 quarters trailing at any given time, especially for that ratio. But for most ratios, I think you should do that and not focusing on any 1 particular quarter.

Losses in a commercial portfolio are very idiosyncratic.

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.

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 a pretty -- if there's any complaint that I would have is something that we don't do much of is 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 will create a lot of disruption. It will create opportunity for us to pick up organically some business. So indirectly, it will 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. Nothing really happening on our perspective on the regulatory front. For the last few years, it's been fine.

[Operator Instructions] Our last question is going to come from the line of Jared Shaw with Barclays.

This is [ Jon ] on for Jared. Just real quick on the loan remix and loan composition remixing, how big is the noncore commercial portfolio just in terms of dollars?

I mean, you can see that there's a table in the press release that breaks that out pretty clearly. So on Page 2 of the press release, $200 million in franchise and equipment finance, $720 million in municipal finance. And then I mean, mortgage warehouse is right now at $585 million. We won't call that core or noncore, but we're not trying to run that down. That should grow, not run down. So -- but those numbers are all laid out in detail on the second page of the press release.

Okay. Great. And then just on capital levels, CET1 is 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? How would you manage that?

From a capital perspective, I'd say -- what we say, our CET1 ratio is now 12%. We benchmark ourselves to our peer groups, I think we're kind of smack in the middle. It's not like there's -- we're far into 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 will 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 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 will also be looked at in February. I don't want to speak before that meeting happens, but you could 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 side.

Agreed.

Okay. That's clear.

By the way, I just want to go back to one question, the previous question about regulatory question about what positive -- I think the one positive that I do see is there's a lot of stuff that was proposed. On CRA, on broker deposits, some climate rules and SEC stuff. The fact 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 e-mail from somebody yesterday that these are all the list of things that the FDIC is talking about not doing. Not about doing, but not doing. And 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. So that, I'm certainly -- we're happy about.

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

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

Now thank you very much for joining us. Like I said, this is a strong finish to a strong year. And hopefully, this trend, we'll continue to deliver on this. A year from now, we can come back to you with a similar story. And -- 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.

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