BankUnited, Inc. (NYSE:BKU) Q4 2022 Earnings Conference Call January 19, 2023 9:00 AM ET
Company Participants
Susan Greenfield – Corporate Secretary
Raj Singh – Chairman, President & Chief Executive Officer
Tom Cornish – Chief Operating Officer
Leslie Lunak – Chief Financial Officer
Conference Call Participants
Ben Gerlinger – Hovde Group
Will Jones – KBW
Timur Braziler – Wells Fargo
Alex Lau – JPMorgan
Stephen Scouten – Piper Sandler
Jon Arfstrom – RBC Capital
Operator
Good day and thank you for standing by. Welcome to the BankUnited Fourth Quarter and Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Susan Greenfield, Corporate Secretary. Please, go ahead.
Susan Greenfield
Thank you, Michelle. Good morning, and thank you for joining us today on our fourth quarter and fiscal year 2022 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 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, without limitation, those relating to the company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by external circumstances outside the company’s direct control.
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, 2021, and any subsequent quarterly report on Form 10-Q, or current report on Form 8-K, which are available at the SEC’s website, www.sec.gov.
With that, I’d like to turn the call over to Raj.
Raj Singh
Thank you, Susan. Welcome, everyone. Thank you for joining us. So we announced earnings this morning. EPS for the quarter came in at $0.82; for the fiscal year, $3.54. Let me get quickly into the components, the key components that you will find in the release.
Loans. Loan growth came in at $619 million. If you look at our meet and pay [ph] businesses, commercial and CRE, it actually grew $722 million. So very happy about — what the lending teams were able to get done this quarter.
Deposits, which are under a lot of pressure across the system, we actually grew deposits a little bit, $160 million, though NIDDA did decline given the rate environment and how Fed funds is. So NIDDA decline was $756 million.
DDA now stands at about 29% of our total deposits. When we started this DDA growth journey in five, six years ago, I think we were at 14%. Just before the pandemic, we were at about 18% DDA. Today, we’re at 29%. So feel pretty good about it. Despite the reduction in DDA that we saw this year, we’re still in a pretty decent place.
Margin expanded again, though a little less than in previous quarters, as we have highlighted to you. Margin came in at 2.81%. It was up from 2.76% in the prior quarter. So for the year, I think margin grew by 30 basis points, which is right in line with what we have guided to you at this call last year.
Provision, before I talk about provision, let me talk a little bit about credit quality. Criticized, classified assets continue to come down as they have over the last many, many quarters. Our NPLs are actually now at 42 basis points. They were 64 last quarter, and this includes a guaranteed portion of SBA loans. If you back that out, NPLs are now down to 26 basis points.
Just before this call, I asked Leslie to check for me what the NPLs were before the pandemic hit. And NPLs today in dollars are at $105 million. And before the pandemic hit, we were at $205 million. So NPLs today are half of what they were. And so from a credit quality perspective in the portfolio, the last two years, we’ve been sort of consciously and subconsciously been getting ready for whatever slowdown is coming, and we feel pretty good about where we are whatever comes our way.
Having said that, we are more pessimistic about — or more cautious about the environment than we were three months ago. So we did tweak our assumptions and increased our reserve. We took our reserve up from 54 basis points to 59 basis points. We, of course, had growth in the portfolio. All of that added up to a provision of just under $40 million.
Also, the buyback continued as we have promised last time. We had bought back, I think, in the fourth quarter, $65 million. We’d already bought $10 million in the — from this authorization in the previous quarter that leads to $75 million in this authorization, which we’re continuing to — we’ll continue to execute as we see fit.
Quickly, let me talk about the environment, and then we’ll talk about guidance for next year. The environment, 2023, this is a year of the slowdown and possibly even a mild recession. That seems to be the consensus out there. The curve is inverted. As everyone can see, the Fed wants to take short-term rates up closer to 5%, and the 10-year certainly wants to go closer to 3%. So it’s an inverted yield curve and it is expected to stay inverted all through this year, probably into next year as well.
Last year, the Fed slammed on the brakes. This year, they’re not slamming on the brakes. It looks like they still have some pressure on the brakes, and they’ll probably take the foot off the pedal sometime this year, but it’s unlikely at least based on what the Fed is saying that they will step on the gas pedal. The market disagrees and only time will tell eventually how things play out. We build all of our internal models and projections and everything based on whatever the future curve is getting us.
Labor costs, while they were very high last year, I would say they are still higher than usual, but they are moderating somewhat, based on some weakness that we’re seeing in certain sectors. So that is good news that labor costs start seems to be getting back to normal, but it’s not back normal yet.
On the other side, it is good news. Margins are better than we’ve seen. Lending margins, loan pricing is very rational. We’re getting paid for taking credit risk, pretty much across the board from the safest to — across the spectrum, any kind of asset you want to participate in, margins are 50, 70, 80, 90 basis points better than they were just nine months ago.
And most importantly, Fed is succeeding in its mission of controlling inflation. That was very important. Three or six months ago, this looked like a pretty crazy place that the economy was in, but the Fed is finally having success. And eventually, that will also have an impact on this inverted yield curves are not good for bank margins.
So, as the Fed finishes this tightening and get to the other side, it will be a better rate environment for banks. But right now, it’s an inverted yield curve which is tough.
Last year, we gave you guidance around loans, deposits, margins, and so on. We said loans would grow mid to high single-digits. It grew 6% in total, 13% for C& I and CRE, our main mega site bread and butter categories.
Deposits, we said mid-single-digits, but starting in January of last year, nobody foresaw what the Fed was about to do. I don’t think even the Fed foresaw what they eventually did. So, we missed on that.
Margin, we said would expand, it did, at 30 basis points, came in exactly as we expected. Expenses, we said would grow mid to high single-digits and it did, 7.5% growth in expenses. And the end result was — we also said we would buy back stock, and we did, a little over $400 million worth of stock.
NII grew 15% based on — actually, one of the metrics I asked this morning — I also looked at 2019 as sort of a year to compare things to because 2021 were pretty messy years with large provisions and reversing provision and so on. And really clean year is 2019, and I often ask about, just like I said about NPL total, our NPLs at the end of 2019 versus today where they are.
I asked about margin also and our margin has — despite the difficult rate environment, our margin is significantly better than it was in 2019, which is sort of an end result of all the hard work that has gone into improving the franchise.
Cost of funds, while it is elevated at 142 base cost of deposits, 142 basis points, it is 142 basis points in an environment of north of 4%. Fed funds rates would be get to 5%.
So, it is — a lot of progress has made on the balance sheet, whether you look at credit metrics or profitability metrics. Yes, there is a lazy part of the balance sheet still sitting there, very large securities portfolio, large resi portfolio, which will sort of wind its way down over time. But overall, I think the balance sheet is in a much better place than it was before the pandemic.
This year, given everything I’ve said about the environment, I think we’re looking at loans growing at mid-single-digits, deposits doing the same. Margins still expanding, though not as much as it did last year. And expenses, again, very similar to last year — expense growth.
Buyback will continue. We will get this $75 million done over the course of next few weeks. And all likeliness, the Board will authorize another $150 million after that.
A quick reminder. It’s been now nine months since we launched our Atlanta presence. I’m extremely happy with how that has panned out. We did open a branch in Dallas, but we did not truly acquire a team on the commercial banking side. We are in the market for that now.
So Dallas will be the project for this year in terms of having full capability in Dallas, not just a branch. Atlanta is off the races. I’m very happy with that. And I think going forward, we will look to opportunities like Dallas, like Atlanta and continue to grow this, and this will become part of our ongoing strategy.
So with that, I don’t want to take away all the talking points here. I’ll leave some for Tom. Tom, I’ll pass it over to you, and then you can pass it to Leslie.
Tom Cornish
Great. Thanks, Raj. So as Raj mentioned, total loans grew by $619 million for the quarter, C&I grew by $599 million and CRE grew by $123 million for the quarter. And overall, as we to continue to meeting the cadence analogy, the $722 million growth in those two lines of business was extremely encouraging for us.
We felt great about it. And I think if we break it down a little bit and look at industry components and asset classes, it was really broad. You can see in the supplemental data that we generally provide, in the C&I side, we grew 11 different segments during the quarter. That really led to $600 million essentially of loan growth in the quarter. It continues on a strong C&I growth number for the entire year. So separately kind of our middle market and corporate banking business, it grew by 25% for the year. So it was just an outstanding year.
I think that’s reflective of both our own efforts, and it’s also reflective of the fact that we’re in great markets. Florida has performed extremely well. All of the major cities in Florida have done very well. We’re blessed to be in great markets. As Raj said, we really couldn’t be more delighted than we are with what we’ve been able to accomplish in Atlanta in a very short period of time, multi-hundreds of millions of dollars of commitments in that market, excellent relationships. And we are very enthusiastic about expanding into Dallas.
We see Dallas is a very parallel market to Atlanta in terms of size of the MSA, in terms of depth of the economy and breadth across the number of industry segments that fit the kind of risk profile that we’re looking for in terms of diversification. And so we’re excited about that.
Rest of Florida continues to do well. We saw good growth in the commercial segments in the New York market in the quarter and throughout the year. So I think both the combination of our efforts, the segments that we’re in and the overall health of the markets that we’re in were very important parts of the growth story in the quarter and throughout the year.
Last quarter, we had a bit of a growth in CRE. We told you we have more, and we did. That’s also, I think, a good, solid commitment to the fundamental parts of the business we want to grow. We had solid growth in the industrial and warehouse segment, again, which is really strong, particularly in the Southeast.
We have committed a bit more resources to our construction lending efforts and saw the construction loan portfolio pick up a bit. And we’re particularly active in the multifamily construction area, which is a strong growth area and virtually every market that we’re in, multifamily units continue to trail the need for multifamily housing in most of the areas that we’re in.
So those things really led to what we feel really good about in terms of our growth story for the quarter and for the year. There’s some other – other areas, mortgage warehouse, that environment remains pretty challenged right now. We’re committed to that business. We think we’ll see some growth in it. But right now, the overall housing market, as you know, is not robust. So, we’re seeing utilization rates fairly low in that business right now.
Pinnacle and Bridge continued to decline during the year. I think if the tax rates improve and pricing improves in Pinnacle that may be an area for growth. We continue to deemphasize the franchise lending and the equipment finance area, both from an overall quality and just return on asset perspective is not very attractive to us right now.
Resi grew modestly in Q4. So looking forward into this year, we continue to see growth in the core C&I and CRE books. We see it across all of our geographies. As I said, we’re committed to mortgage warehouse for the long term and expect to see some growth in that portfolio.
Also, if the environment for Ginnie Mae and EBO business improves, there could be some growth opportunities there as well. We also continue to build sales teams, and bring on new producers in the market, and we’re looking at some key hires even in this quarter as we start off the year, even beyond the Dallas expansion that we’ve talked about.
On the deposit side, total deposits grew by $160 million for the quarter. That growth was in interest-bearing deposits. As Raj said, NIDDA declined for the quarter, which was not unexpected in the environment given the rising rates and tightening liquidity. We had finished the loan-to-deposit ratio at 90%, which essentially was flat from the previous quarter.
So with that, Leslie will get into more details on the quarter.
Leslie Lunak
Thanks, Tom. As we guided last quarter and as Raj said, we saw the NIM increased this quarter to 2.81% from 2.76%. The yield on investment securities increased to 4.33% from 3.12%. The duration of this portfolio stands at 1.94% at December 31. The yield on loans grew to 4.72% from 4.11% this quarter. That’s all mainly attributable to the resetting of coupon rates on variable rate instruments and new production and securities purchases at higher rates.
Total cost of deposits was 142 basis points for the quarter, up from 78 basis points last quarter. I’d refer you to slide 6 of the deck. While this is a story that is obviously still playing out, you can see on that slide illustration that the spread between the Fed funds target and the cost of deposits have grown quite a bit, compared to back in 2019, which is a testament, in my mind to the improvement that we’ve made in the quality of the deposit base.
Total deposit beta to date this cycle is about 43%. At the peak of the last cycle, our total deposit beta was about 61%. We think it’s going to go up from 43%, but we still don’t think it’s going to get to that 61%.
With respect to the reserve and the provision, slides 9 and 10 give some details about the reserve. The provision this quarter was $39.6 million. The ACL increased to 59 basis points from 54 basis points. As Raj mentioned, in spite of the decline in our NPLs and favorable credit quality signs, we built reserves primarily due to an increasing level of uncertainty about the economy. And qualitatively, we weighted a downside scenario more heavily in establishing our reserve this quarter.
We did a — majority increase in specific reserves that you saw this quarter, which was another contributor to the reserve build related to one single loan that was charged off before the end of the quarter. And substantially all the charge-offs taken this quarter were related to that particular loan.
There’s not really much to comment on with respect to non-interest income and expense. I’ll just reiterate that for the year, non-interest expense, if you factor out the hedge loss that we took in the fourth quarter of 2021, it was up 7.5%, which is really exactly what we’ve been guiding to since the first of the year. So we came in right where we’ve been telling you we would with respect to that. I don’t think there’s anything there particularly to comment on for this quarter.
So, with that, I’ll turn it over to Raj for closing comments, and then we’ll take your questions.
Raj Singh
I will open it up for questions. I know there are 19 other banks that have released. So we will — let’s take questions. Operator, you can open up the line.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Ben Gerlinger with Hovde Group. Your line is now open.
Ben Gerlinger
Good morning, everyone. Appreciate you taking the time.
Raj Singh
Good morning.
Ben Gerlinger
I was curious, I just want to follow up on the guidance that was given. You said kind of the mid-single-digit loan growth and deposit growth. Was that correct?
Raj Singh
Yes.
Ben Gerlinger
And then, kind of, thinking just the deposit perspective, with quantitative tightening and kind of fighting against the treasury curve, really, in terms of what else is available to depositors. I mean, when you look at year-over-year, your deposits are down.
I was curious, is there any new action, or are you willing to go to price the market in order to garner some overall growth relative to peers? I mean, you guys aren’t the only ones. I don’t mean to pick on you, but deposits are down. I was just curious on what actions or strategy might be taking to get them up.
Raj Singh
Yes, yes. I think the big difference — and we could be wrong on this, but the big difference from last year to this year is that we’re not expecting that slamming of the brakes that we saw with the Fed, but a more gentle sort of slowdown, tightening of monetary policy and eventually ending that tightening.
If the Fed continues to surprise us with very aggressive actions, then achieving the single digits will be hard. Of all the guidance I’ve given you, whether its loans, margin or deposits or what have you, the deposit guidance is the hardest one to really give. And some of this is also our desire not to let our loan-to-deposit ratio get to out of whack and get past 100 to 105.
So you can’t get the deposits. It comes down to price. So we’re not — loans, you can look at the pipeline and kind of guess, okay, here’s where loan demand is, and this is what I know. Typically we’re able to close up the pipeline and so on.
The deposits, it’s much harder. But based on another 325 basis point increase and eventually slowing on rate hikes, I think if that’s what happens, there is a good chance that we will end up at mid-single digits, if it’s worse, if the tightening is harder and stronger and longer, then there will be it will be tough to get to mid single-digits.
Tom Cornish
Ben, I would also add that one of the things that we look at is when you look at the creation of new relationships across the franchise, and you look at virtually all of the business segments that we’re in, the overlying economic activity obviously impacts the balances that might be in any individual account. But we have very, very good trend line information in performance history this year as it relates to the number of new relationships being created by all of the sales teams. And that gives us some confidence that, that will continue as we look into the year.
Ben Gerlinger
Got you. Yes. No, I’m probably thinking that you guys could get the deposits just really at what cost. And then kind of conversely to that, are you guys are expecting some margin expansion from here? So that’s from just kind of squaring triple to some degree?
Tom Cornish
Yes.
Ben Gerlinger
But the latter question I had is more kind of the nuance probably for level. But when you think about the expenses, BKU has historically had some pretty clear seasonality, I guess, you could say from quarter-to-quarter, but that kind of has fallen off as of late. I was just kind of curious, should we still expect 1Q to be a little bit higher relative to Q3 and then fourth quarter is the highest in the year, or is that kind of gone to the waste side? I was just trying to look for some overall quarter-over-quarter expectations. I guess the whole year is around seven ballpark, but just quarter-to-quarter?
Leslie Lunak
Sure. We don’t spend a lot of time obviously focusing on any one particular quarter. But typically, compensation expense is higher in the first quarter just due to the impact of certain payroll taxes and benefits and whatnot. But as we’ve been investing in people and bringing new sales teams and support people on to support growth of the business, you may have seen that trend move out a little more because those people tend to come on over the course of the year, and headcount may not be held constant.
So again, don’t spend a lot of time and energy trying to figure out what the quarter-to-quarter forecast is. I’m more concerned with the year as a whole. But you will see that spike in benefits, but the trend maybe smooths out a little bit by new FTEs coming on more evenly over the course of the year.
Ben Gerlinger
Got it. Okay. That’s helpful. Appreciate the time, everyone. You guys have done a great job kind of remixing the deposit side of the balance sheet. So it clearly sets you guys up in a much better position than where we were a few years ago. Thank you.
Raj Singh
Thanks.
Operator
Please standby for our next question. Our next question comes from Will Jones with KBW. Your line is now open.
Will Jones
Great. Thanks. Good morning guys.
Raj Singh
Good morning.
Leslie Lunak
Good morning.
Will Jones
Yes, so I wanted to step on the expenses first. Raj, just to clarify, you said expense guidance is the same as last year, which would be mid to high single digits, correct?
Raj Singh
Yes.
Will Jones
Okay. And just as we think about the base was with — that mid high single-digit growth of, is the right way to think about it to annualize the fourth quarter and grow from there, or is it really just cumulatively?
Leslie Lunak
Yes, take the full year. Take the full year and apply that to the full year.
Will Jones
Okay. Now that’s helpful. Thank you. And then, Raj, I know you called out maybe one or two maybe non-recurring or one-time charges that happened in the third quarter. Was there anything similar that happened in the fourth quarter? I know there’s still a fairly big pickup in expenses?
Raj Singh
Not really.
Leslie Lunak
I don’t think there’s anything particularly unique in the fourth quarter.
Raj Singh
Yes, right.
Will Jones
Got you. Okay, great. Thank you. And then just moving to — I appreciate all the great commentary of the allowance and the bumped-up linked quarter there. Just as it relates to the one charge-off you guys took, I was just hoping to get a little more color around that. I appreciate there were some specific reserves tied to that charge-off. It looks like maybe based on the way your NPAs moved, those CRE loan, but I was just hoping to get a little more color?
Raj Singh
So, that loan, it didn’t work out. So, I have to be careful what I say. What I will tell you is in a situation where we lose faith in the financials of the company, the certified financial of the company, we intend to charge-off the loan. We basically write-off the target.
This is a developing situation. It’s only three months in terms of when we really found this out and a little more than three months into this. And we just took the most conservative stand, which is we can’t — we don’t really know — there’s some — it looks like there will be some regularities in financials of the borrower, and we’re just going chalking off the loan, which is what we did.
Now, there are recoveries that have come back. I’m hoping there’ll be some recoveries, but not knowing that with any confidence, we just quite often talk about.
Will Jones
Great. Digging deeper, is there any in a specific industry or any kind of specifics around the nation?
Raj Singh
It’s a one-off situation. Is it — the when you audited financials come into question, it’s not about the industry. It’s about just that one situation.
Will Jones
Got it. Understood. Thanks. And then just thinking holistically, you have mid- to high single-digit expense growth year-over-year. I appreciate the guidance. So, you think that the margins still cause a little expansion from here? Just putting the two together, Raj, do you feel like you could still grow revenues over the mid to high single-digit expense guidance and still maintain some of your positive operating leverage as you move to 2023?
Raj Singh
Yes. Yes. Over time, I absolutely agree that that’s what we’re shooting for, and that’s what we will get to. It may not be that literally every quarter. And it is a tough environment to try and achieve that in. But remember, we’re making investments not for the next six months or for the next even 12 months. Some of these investments we’re making are multiyear investments with multiyear payoffs.
We had a lot of discussion this time around during the budgeting season as to — this is a year of slowdown, possibly a recession. The curve is inverted. Should be pulled back on investments? And you really cannot take a very short-term view of investing. You have to take a longer term view. So, the things that we put into motion, we’re not going to pull back because the next couple of quarters might be a difficult banking environment or there may be a recession in the second half of the year.
You’re hearing me talk about — we launched a plant the last year. We’re launching something in Dallas this year, possibly new markets next. These are all long-term investments, so are some of the technology investments. So, you can’t yoyo your investing sentiment quarter-by-quarter or even year-by-year. You really have to stay the course. We have — from an expense to asset ratio, we’re one of the — not just better, one of the best banks in the country. I sometimes argue that we’re not investing enough, which is why our ratios are as low as they are.
So investing on a steady pace is important. Revenue, unfortunately, it does get a little bit – it’s more tied to the environment that we’re in, and this is a tough year, but next year will probably not be. So but over a period of time, which you just said is our expectation revenue will grow more than expenses? Absolutely. Otherwise, why do it.
Leslie Lunak
And I will say currently, our forecast is for a modest amount, not a lot.
Raj Singh
Yes.
Leslie Lunak
But a modest amount of margin expansion next year. Obviously, as Raj alluded to earlier, the hardest part about that to predict is the deposit environment.
Raj Singh
Yes.
Will Jones
Right. Got understood. Great color, Raj. We appreciate that. And that’s all the questions I had. So, thank you.
Operator
Please standby for our next question. Our next question comes from Timur Braziler with Wells Fargo. Your line is now open.
Timur Braziler
Hi, good morning.
Raj Singh
Good morning.
Leslie Lunak
Good morning.
Timur Braziler
Maybe circling back to that last comment from you, Leslie, on margin expansion next year. I guess what’s the rate environment or rate outlook that you’re using that guidance? And then just looking at the deposit spot rates ending the year versus the average, it seems like there’s going to be a headwind in the first quarter.
Leslie Lunak
Yes. Yes.
Timur Braziler
Is that kind of back-end loaded that comment, or do you think there’s enough happening on the asset side to offset some of the funding…
Leslie Lunak
I’m not that focused on what happens quarter-by-quarter because that’s extremely hard to predict. But we’re using the forward curve. So this has Fed funds peaking at 5% in the second quarter and dropping to 4.5% to 4.75% by the end of the year with an inverted treasury curve throughout the year. So that’s the forward curve that underlies those estimates.
But as I said before, the wildcard is the deposit environment, as Raj expressed, we’re very confident that we can grow core deposits this year. Based on our geographic expansion, the growth of the Florida economy, the producers that we’re adding, our business people are very confident that we can grow core deposits given the environment that we think we believe is going to play out. So the Fed’s been on the brake harder, the environment will be more challenging than we think that, that margin prediction could come under pressure.
Timur Braziler
Okay. And maybe just asking you to look at the deposit crystal ball over time. But on the way down or once the Fed stops at least hiking, what’s the expectation for the deposit environment in your geography? I mean, I’m assuming it’s going to remain competitive, but could you actually see deposit pricing continue to increase if the loan demand is still there, or do you expect it to kind of tail-off at a similar pace to what it did on the way up?
Raj Singh
You’re asking about, not just in the next six or 12 months, but beyond that. And it’s very hard for me to say what the deposit environment will be like. But there is a lag. On the way up, there is some line on the way down as well. And — but it’s really hard for me to predict what will happen when the Fed starts to pull back. I don’t know what the loan demand would be like. I don’t know what the economy will be like. Will we be in a recession or not? It is, I would say, the best – it will be hard actually for you to even go back at that last cycle and try and look at that – but last cycle was really weird. But we’re not going to have a effect going to zero overnight kind of a situation. It’s going to be a slow, slow drop, a very gentle decline is what I think will happen with effect. But it is very hard for me to say what will happen a year out.
Leslie Lunak
Yeah. I do think the more rate-sensitive part of the deposit portfolio will respond very quickly, either way on the way up or the way down. But with the more core portions of the deposit portfolio, I think you see a lag on the way up, but you also see a lag on the way down. And it is very difficult to predict. I wish I had that crystal ball more for you.
Raj Singh
And remember, it’s even more complex for us, because a lot of our deposit business is in one way, shape or another tied to the – the real estate business, right, the refi business, which is dead right now, or even the purchase business, which is not doing that well. So, we could have a mini refi boom before you know it. I mean, if the tenure is floating with 3.35, that could happen and that could actually help that will help the warehouse business, but that will help the deposit business as well. It’s a lot of pain that we felt this year was from the title insurance space.
Leslie Lunak
Yeah.
Raj Singh
And that industry is a deep recession, so to say, if you talk to anyone in that industry. But that could come back. That’s very risk sensitive. And that doesn’t have to move too much. It’s just the long-term rates keep doing what they’re doing. You could have a significant pickup in activity. We’re not counting on that, but we’re very consistent of that sort of coil spring, if you were to say.
Timur Braziler
Right. Okay. I appreciate that. And then just lastly for me, the C&I growth all year and in the fourth quarter was quite impressive. I’m just wondering, how much of that is increased utilization, if any? How much of that is new client growth? And then are you able to get deposit relationships with those new C&I clients that you’re bringing on board? How much of that production is actually being self-funded?
Tom Cornish
Yeah. I would say that, we saw a very little lift from utilization throughout the year. When we look at production in the C&I teams throughout the entire year, it was a very strong new client production, new relationship production. We are able to get significant deposits out of these, most our general focus is on relationship banking opportunities, and these tend to come with strong depository and treasury management type relationships.
But we didn’t see much lift at all in utilization rates throughout the year. So we’ll see how that plays out into 2023. Originally, when we started the year, we thought we would see more lift. We thought we’d see maybe 500 basis points of lift. We didn’t see that. It stayed pretty flat throughout the year. And if that were to pick up, that would help us as well. But what we did this year was really a lot of new relationship production this year across all of the C&I segments.
Timur Braziler
Got it. Thank you for the color. Appreciate it.
Operator
Please standby for our next question. Our next question comes from Steven Alexopoulos with JPMorgan. Your line is now open.
Alex Lau
Hi. Good morning. This is Alex Lau on for Steve.
Raj Singh
Good morning, Alex.
Tom Cornish
Good morning.
Alex Lau
My first question is on deposits. Can you talk about the decrease in non-interest-bearing deposits? What are your clients moving those balances to? Any color on whether it’s moving internal or competition from T-bills or in other regional banks?
Leslie Lunak
You’re talking year-to-date. We’re not talking this quarter, because we didn’t experience that this quarter in non-interest-bearing deposits.
Raj Singh
Well, we do. Yes.
Leslie Lunak
In interest — oh, sorry, sorry. I misunderstood your question. I misunderstood your question
Raj Singh
Yes. So it’s a laundry list of things. So there’s still a slowdown in the real estate industry. We’re seeing our title business average balances in those accounts from the smallest, the largest, everything declined. So it’s an industry-wide trend. That is one.
We saw people — our clients use money for buybacks or dividends, just distributions. That was a fairly large category. Also, I’d say, as ECRs have moved up, they need to keep balances to avoid fees from the bank. That needed balance have gone down. So when that happens, capital frees up and it moves into money market or leaves the bank and goes, go out and buy treasuries.
We don’t have a wealth management business. So we’re not seeing that. Corporate customers don’t typically take money out the bank and buy treasuries, though some of that might be happening with whatever small retail business that we do have. So it’s a mix of those things.
But I’d say that the real estate industry suffering is still probably our largest driver, followed shortly with just people taking distributions and using money for either investments or buying properties or what have you. So there is — money is not being left idle and people are much more corporate customers, commercial customers, they are much more aware that — of the cost of idle money.
Alex Lau
Thanks, Raj.
Tom Cornish
Yes. Just, Alex, in 2021, there was a pretty substantial buildup in corporate deposit balances across really all industry segments coming out of the pandemic that has just been utilized.
Raj Singh
Yes.
Alex Lau
Thanks. And as a follow-up to that buildup, any sense of how much DDA is considered excess deposits per your customers before they get to like a core operating DDA level?
Raj Singh
No, that’s very hard for us to do.
Leslie Lunak
We spend a lot of time trying to analyze that, but I don’t — I still don’t think we know the answer to the question.
Alex Lau
Fair enough. And on the net interest margin guidance for expansion in 2023, any color in terms of the trajectory? Do you expect expansion every quarter, or at some point, do you expect a reversal of that, but still end the year higher?
Leslie Lunak
I think it’s — that’s very difficult to predict. There’s just too many external factors, particularly with respect to funding that are going to impact what happens quarter-by-quarter. I think, looking at the year as a whole, we can get a little bit better idea, but I’m reluctant to try to pinpoint what the NIM is going to be quarter-by-quarter.
Alex Lau
Got it. And just one last question on the other fee income line of $7 million. It was a little bit elevated this quarter compared to the rest of the year. Can you touch on what drove this? And if there’s anything one-time in nature there? Thanks.
Leslie Lunak
It’s just really a cats and dogs, Alex. There’s no one thing. There’s a lot of puts and takes in there. One of the things that’s been kind of volatile over the last year or so has been BOLI revenue. I don’t really know how to predict that, but it’s no one thing. There’s just a lot of puts and takes in that line item. So I don’t think there’s anything that I would necessarily regard as either something to call out specifically.
I do think in terms of the core items that are in non-interest income, we’ll see a steady increase, but all the little puts and takes can be episodic and volatile. I don’t think there’s anything material enough to call out in there.
Alex Lau
Okay. Thanks for taking my question.
Operator
Please standby for our next question. Our next question comes from Stephen Scouten with Piper Sandler. Your line is now open.
Stephen Scouten
Thank you. Good morning everyone. Appreciate the time. The NIM guidance for next year is pretty encouraging relative to what we’re seeing for most of the industry for the potential pace of expansion. Can you tell me, I guess, one, is that from the 2.81% fourth quarter level, or is that more from the 2.68% full year level?
Leslie Lunak
I mean, I was really, when I gave you the guidance, was referring to the full year level. I’m taking a look right now if I can find it just to see. I would expect it to expand from the 2.68% full year. I would also expect it to expand from the 2.81%.
Stephen Scouten
Okay.
Leslie Lunak
Having said those, with caveat, again, it’s going to be a very challenging deposit environment. And if that doesn’t play out the way we’re forecasting, that you have to put some pressure on that.
Stephen Scouten
Yes. Sure.
Raj Singh
And we’re not expecting as much of a pressure as we did this year. So it’s…
Leslie Lunak
No, no. It will be very modest.
Raj Singh
Yes, modest.
Stephen Scouten
Understood. Understood. I’d still say that’s encouraging, and it probably plays to an earlier point, maybe that, Raj, you said you feel like you’re getting paid for your growth, getting paid for the risk you’re taking. So can you talk to maybe what you’re seeing on new loan yields? Because I’m presuming you’re seeing some good expansion there even in light of the funding pressures.
Leslie Lunak
I think new commercial loans for the quarter, so higher at the end than at the beginning, but for the quarter, new commercial loans came on in the mid-6s on average. That’s C&I and CRE and everything we did in the commercial space averaged together for the quarter.
Stephen Scouten
Okay. Great. Okay. And then maybe digging back into expenses really quickly. I just want to make sure, like if I look at expenses, it looks like they’re up 12% year-over-year, 7.6% quarter-over-quarter, so just want to make sure if we’re…
Leslie Lunak
When I — yes, when I take total expenses for this year, total expenses for last year and I back out, once my math is wrong, which is possible, and on back out debt hedge termination loss we had last year, I’d get an increase of right about 7.5% year-over-year.
Stephen Scouten
Yes. Yes. I’m doing the same thing and getting like 12%. But I guess, either way, the expenses have gone up about $10 million a quarter, each of the last two quarters kind of in line with revenue growth. So do you think in 2023, that, that revenue growth can kind of outpace the size of expense growth?
Raj Singh
My comment, a couple of questions ago, long-term, that’s what we’re shooting for. It doesn’t always happen every quarter, and 2023 is a tough year to actually achieve it. But that is certainly — we’re going to achieve long-term.
Leslie Lunak
I mean, our forecast would show that revenue growth will exceed expense growth next year, but it’s a very challenging revenue environment, and there’s a lot of things happening in the environment that we have no control over.
Stephen Scouten
Definitely. Okay. And then last thing for me is the big question I get from investors a lot is where is the margin for error at BankUnited, if we’ve got, what was ROA this year, 80 basis points, 67 basis points this quarter and then 1 of the lower loan loss reserves still at 59 basis points. So, I guess how would you speak to that and kind of a wage folks that might have concerns that if we do enter a worsening environment that there’s just less margin for a given the lower profitability and lower reserves?
Raj Singh
I think our margin as well as our reserve levels are a function of the portfolio that we have. We have — compared to a typical bank, we do have a much higher level of resi on that resi being government guarantees. We have investment-grade municipal portfolio. So, we have a lot of these loan portfolios that have lower margin and lower losses and lower reserve.
I think that the point I made early on, that if you look at where our NPLs are at the absolute level at 26 basis points, excluding sort of guaranteed SBA loans, that is also alluded to the kind of portfolio we have.
If you look at on a relative basis where our NPLs were, December 2019 to where we are today, our NPLs are half. So, the portfolio over the course of the pandemic has really become even safer, but we’ve been able to grow margin, not because we’re taking more risk, but because we improved our deposit base.
So, margin has improved significantly from 2019. NPLs have come down significantly from 2019. Deposits have improved significantly from 2019. So, sometimes just looking at a number at the top of the house without color behind why that number is what it is, is often where people get tripped up. Every bank is a little bit different. And over time, you really have to look at the composition of the balance sheet to really get good answers on why the numbers make sense or don’t make sense.
Stephen Scouten
Okay, great. That’s very helpful. Raj. I appreciate the time everyone.
Operator
Our next question comes from Jon Arfstrom with RBC Capital. Your line is now open.
Jon Arfstrom
Thanks. Good morning everyone.
Raj Singh
Good morning.
Leslie Lunak
Good morning Jon.
Jon Arfstrom
Steven kind of took my question, but I’ll ask it a different way, Raj. What — are you more pessimistic, or is this step-up in provision just out of caution, your cautious nature? And what is–
Leslie Lunak
I would say we’re more cautious.
Jon Arfstrom
Yes, what’s the provision message going forward, I guess? Because obviously, the lower ROA was driven by that. Yes.
Leslie Lunak
We think — yes. the provision this quarter was pretty heavily influenced by the Moody’s S2 downside scenario. So, I think we’re well-positioned from a reserve perspective in the event of a mild recession.
Obviously, if the economy totally goes off the rails and we have a severe recession, well, all bets are off for the whole industry. But I’m not expecting that to happen. So, I think we’re very well-positioned. And I expect provisioning — sitting here today, I expect provisioning for 2023 to really be mostly a function of production.
Jon Arfstrom
Yes, growth plus charge-offs is what I’m thinking.
Leslie Lunak
Yes. Yes.
Jon Arfstrom
Okay. Are you guys seeing any changes in the quality of your pipelines at all?
Raj Singh
Not in the quality, but in the quantity, we have seen some — a little less robustness in the pipeline. And some of it is probably because we had a pretty good quarter, and we closed a lot of stuff. Nothing really spilled over into January. But some of it, I suspect, is also customers basically looking at the environment and saying, maybe I want to wait a little bit to make the next investment, build the next factory or the next payoffs.
So some of that, when we talk to clients, I can see the intended effect that the Fed wanted to have, it’s actually happening in the real economy. People are more cautious. People are thinking hard about their expansion plans and being, on the margin, a little more cautious. So that is also influencing our guidance we’re giving you about loan growth that in next year, in which everyone is expecting a mild recession, you’re not going to see some outsized level of growth. It would be responsible.
Jon Arfstrom
Yes. Okay.
Tom Cornish
Yes, I would add, you particularly see that in the real estate business where pipelines and investment is driven by — there’s a substantial amount of capital on the sidelines today in the real estate markets. But if people kind of read into what they think the curve is going to look like or at least what the curve looks like today, that towards the latter part of the year, people are thinking the cost of debt will be — fixed rate debt will be less than it is today. So investment strategies are being paused a bit, particularly in the CRE markets.
Jon Arfstrom
Yes. Okay. And do you guys think a pause probably changes that, that outlook a bit?
Leslie Lunak
No, I think that is encompassed in the outlook that we gave you.
Jon Arfstrom
Okay. Okay. And then just one more on commercial real estate, the $30 million number last quarter. So maybe that’s the number we’re looking at. You guys don’t have a single non-performer the way you categorize commercial real estate?
Leslie Lunak
Correct.
Jon Arfstrom
Talk a little bit about what you’re seeing in the quality of the portfolio. It’s obviously on every investor’s mind, but it looks like your portfolio is very, very clean. Are you seeing any roading? Are you being more cautious, or do you feel like this is more symbolic of your portfolio and maybe the industry is going to get a little bit worse? That’s all I had. Thanks.
Raj Singh
Yes. I think it’s a very detailed answer because it’s not a portfolio, a lot of sub portfolios that add up to it. So I think where the industry needs to be cautious is obviously central business district office. That is, again, probably not as much of a deal in the next 12 months, but over the next 24 to 36 months, that’s the asset class to really pay attention to.
And it will be an evolving story. And we’re spending a lot of time focused on whatever little of that we have. Now it helps us tremendously being in Florida, where everything is getting absorbed in Florida. But in markets outside of Florida, New York, for us, for example, and for other banks at the other part of the country, that’s the asset class that you want to pay attention to in the medium-term.
I think in the short-term, it’s not really an issue. And — but outside of that, retail has been a perpetual issue for banks. I think for the most part, banks have put that behind, and multifamily, warehouse industrial is still doing very well.
Tom Cornish
Yes. I would add, we’re super asset-allocation focused. When we think about the real estate portfolio, we’ve got a very disciplined approach to thinking about what sectors, geographies and asset classes we take exposure in. And even the broadest categories, as Rod said, really have multi-categories. So an anchor – a grocery store anchored center in Boca Raton is very different than retail that might be a Tom Ford store on Madison Avenue in 63rd Street. That’s very different kinds of retail, but we think pretty highly of the quality of the real estate portfolio that we have. And I think when we look at exposures across the platform in areas where we think there could be some softness, we feel really good about what our exposure levels are in those categories.
Jon Arfstrom
Okay. All right. Thank you for the help. Appreciate it.
Operator
Please standby for our next question. Our next question comes from Will Jones with KBW. Your line is now open.
Will Jones
Hey, great. Thanks for letting me jump back on guys. Just a quick follow-up, I wanted to hit on the buyback. I know by our math, you guys had massive buybacks this year, somewhere around 12% of the company repurchased in 2022. Raj, if the stock kind of hovers around the current levels, do you plan to keep the gas on the buyback here? And then just as it relates to your capital, I know you guys don’t look at TCE as much more so common actually, Tier 1 at the bank level. Did you have any internal targets or any internal threshold where you wouldn’t want to see that ratio draw down to? Thanks.
Raj Singh
Yeah. So yeah, we are active. The price of the stock is at right now, it’s a no-brainer from my perspective. And in terms of what ratios we look at, I’ll actually got Leslie answer that. Yeah.
Leslie Lunak
Yeah. We are more focused on CET1. A couple of things we think about when we think about capital levels, we are very protective of the company’s investment grade rating. So we’re very conscious of the ratings agencies’ view of buyback. We also want to be sure we’re retaining sufficient capital to support growth that we see on the horizon. So, those are the two constraints we think about.
Our Board is probably going to meet in the next month or so to improve our actual capital plan for 2023. That hasn’t happened yet. Currently, I don’t anticipate any changes in the way we think about capital targets, but I’m going to refrain from putting them out there until that capital plan gets finalized.
Will Jones
Understood.
Leslie Lunak
But I don’t think anything changed. I would not anticipate that the capital targets that we’ve laid out in the past have changed. But I don’t know that with certainty until the Board meets.
Will Jones
Yeah. This is perfect. Thank you.
Operator
At this time, I show no further questions. I would now like to turn the conference back to Raj Singh for closing remarks.
Raj Singh
Thank you. Appreciate all your questions, all the back and forth. We’re here. Leslie and I are both here, if you have any follow-up questions. But again, thank you so much for joining us. We’ll talk to you again in three months. Bye.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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