Rajinder Singh - President and CEO Leslie Lunak - CFO Tom Cornish - COO

Brady Gailey - KBW Jared Shaw - Wells Fargo Securities Ebrahim Poonawala - Bank of America Tyler Stafford - Stephens, Inc. David Bishop - D.A. Davidson Christopher Marinac - Janney Montgomery Lana Chan - BMO Capital Markets David Chiaverini - Wedbush Securities

Welcome to the BankUnited 2019 Third Quarter Earnings Conference Call. On the call this morning from BankUnited, are Raj Singh, Chairman, President and CEO; Leslie Lunak, Chief Financial Officer; and Tom Cornish, Chief Operating Officer. Before we start, the company would like to remind everyone that this call contains forward-looking statements within the meaning of the US securities laws. Forward-looking statements are subject to risks, uncertainties and assumptions, and actual results may vary materially from those indicated in these statements. Additional information concerning factors that could cause actual results to differ materially from those indicated by the forward-looking statements, can be found in the company’s earnings release and SEC filings. The company does not undertake any obligation to update or revise any such forward-looking statements now, or at any time in the future. With that, I’d like to turn the call over to Mr. Singh.

Thank you so much. Welcome, everyone, to our earnings call. Thank you for joining us. We had another strong earnings quarter, with very strong earnings, strong EPS growth. We reported this morning $76.2 million of net income, $0.70 per share EPS. I think this time last year, we had EPS of $0.90, but that included loss share. And if you cop out loss share earnings, we were at $0.64. so $0.64 last year compared to $0.77 this year, represents about 20% growth in these earnings, which I’m very happy about, given the environment that we're in. that's pretty good progress. Happy to announce that the increase in cost of funds, that curve has now turned. Officially, current cost of deposits came down 3 basis points this quarter to 167 basis points. And this is a small down payment on what we expect to be a meaningful acceleration in the runway trajectory of deposit costs. And I say that, that’s not even taking into account more rate cuts which we are pretty sure - the market's pretty sure there will be at least one more later this month, and probably a second one in December. But even if those don't happen, we expect deposit costs to come down meaningfully based on the actions that we’ve already taken. Let me - usually I start these calls with a comment about the environment. So let me just go back and talk a little bit about things we don't control i.e. the environment. The economy stays - from our vantage point, stays healthy. So I’ll give you the two part way to look at this. When we look at Main Street i.e. looking at our own loan portfolio, things look pretty solid. When you look at Wall Street, there are obviously a lot of signs to be concerned about as we head into next year. So we're paying attention to both those things, and being cautious and not trying to take on excessive risk, but that's sort of the way we’re seeing the landscape right now. The interest rate environment remains challenging. I sound like a broken record, but for the last I don’t know how many quarters, it's been challenging, and it keeps getting more challenging. Right now, the - I think this entire quarter, the curve has inverted. Now, the Fed has moved twice already, is about to move a third time in the next few days, and that will probably addressing the fact to a flat curve, but nevertheless it's a challenging environment for margin and for spread. In light of what we're seeing with the short end of the curve coming down, we have been taking a very defensive view of trying to grow money markets and savings, as is evident in our growth numbers. Deposits grew only marginally this quarter. And if you look at for the entire year, all of our growth really came from DDA, which obviously is at the end, what this game is all about. Loan growth was at $253 million, and there Tom will walk you through. Some parts of the bank came in very, very aggressively. Other parts of the bank saw a runoff, but that's again just changes quarter by quarter. But $250 million of loan growth for the year. I think we're at about, a little over $1 billion, taking into account that we did sell $168 million in Pinnacle loans, as we told you about last quarter. In terms of BankUnited 2.0, I want to give a quick update on that as well. We had come back - come to you, I think in April and laid out plans for the next two years as to what 2.0 would be about, and given you some targets. We’re very comfortable at where we see them today. We still think it's a $60 million bogey, $40 million in cost and $20 million in revenue lift. The update that I would have for you now six months into implementing this, is that on the expense side, we are probably just a tad bit ahead in terms of timing. And the revenue side, we're probably a tad bit behind. Overall, if you combine it, we're right on where we said it would be, that 2021 the total benefit will be about $60 billion. So we feel even more comfortable today than we did six months ago when we were just embarking on this journey. Today, we're pretty far down and feeling pretty good about it. Again, Tom, you can feel free to give more color around that. But margin contracted, like I said, given the interest rate environment, came down from 252 last quarter to 241. I’ll ask Leslie to talk a little bit about that in terms of what happened with deposit curve, which he’ll walk you through the asset yield side of it. Credit, NPAs, NPL ratios, all fairly steady. I think they were down, NPLs down a basis point, NPAs down 2 basis points. Charge-offs stayed about 6 basis points. There was a $73 million update in criticized and classified loans. 42 of that is one relationship in CNI Florida. It's not an industrywide issue. It is an issue that is unique to that particular borrower, and that loan is in the workout. The rest are a bunch of other loans, but it's that $142 million loan that I wanted to mention. We did finish our $150 million buyback and announced another $150 million buyback. It was announced in August, and we will be working on that over the course of the next few weeks or few months. With that, I will turn it over to Tom.

Okay. Thank you, Raj. Want to give just a little bit more detail on some of the BankUnited 2.0 initiatives that Raj mentioned. We have essentially completed our realignment of the commercial lending and credit and support teams, into a more customer centric and less geographic centered silo. We expect this to be an excellent go-to-market strategy for us, giving us an ability to better leverage our specific areas of expertise across the company, our practice group strategies and whatnot across the entire organization, and also to develop a great deal more operational efficiencies. Despite the challenging environment that Raj mentioned, continuing investment and strengthening of the sales teams across our industry verticals and business segments, is really helping us deliver good quality production in the areas that we are really focused on from a growth perspective. We’re also seeing, as part of the revenue initiatives in 2.0, very early strong progress as it relates to treasury management sales, deepening relationships, expanded number of products per client, and our revenue trends. And that area has been ahead of expectations, and we're very happy about that. One of the major things we did in this past quarter is, we launched a new commercial lending team in the Atlanta market. We think Atlanta has got great prospects for us. It’s a wonderful middle market, one of the largest middle market segments in the US. We've traditionally had some lending corporate banking business in the Georgia market, and we hired a team in Atlanta that opened up an office a few weeks ago, and we're very optimistic about the opportunities for us, both from a loan and deposit side in the Atlanta market. A little bit more color on the loan and lease growth. As Raj mentioned, loan growth of $253 million for the quarter, was driven by growth of $341 million in mortgage warehouse outstandings. They really had a grand slam quarter. It was a great quarter for that team, both in terms of overall growth and growth in commitments. The residential portfolio grew by $ 308 million, $182 million of which was in the Ginnie Mae early buyout portfolio. In some of our core commercial areas, we did see runoff in most of these areas increase. We were down in multifamily $162 million. Most of that was in the New York multifamily market, and a good portion of it was in the rent regulated market that's gone through a significant amount change recently. We’re down 1$20 million in other CRE, and our CNI businesses were down $84 million. Overall, the production for the quarter was good. It was in line with what we expected, but we're continuing to see a great deal of pay offs in some of these segments. In BFG, we were up modestly, and we had some moderate runoff in the Pinnacle portfolio. Deposits grew by $34 million for the quarter, as Raj mentioned, $27 million of which was non-interest DDA. At the end of the quarter, we had a bit of atypical volatility in a few large commercial DDA accounts by quarter end. But I would say, just sort of in closing, as we look at the next couple of quarters, we think that the loan and deposit pipelines look good and actually October started out well in terms of new funding, some transactional volume that we've seen. So with that, I’ll turn it over to Leslie.

Thanks, Tom. Start by taking a few minutes to talk about net interest income. Net interest income declined by $66.3 million compared to the third quarter of the prior year, while the NIM decreased to 241 from 351. These decreases were expected, given the terminations of the loss share agreement in final portfolio sale of coverage bonds in Q4 of 2018. The NIM declined 11 basis points from 252 for the prior quarter ended June 30, to 241 this quarter. This is mainly due to declines in the cost of deposits, lagging declines in yields on interesting assets, to some extent LIBOR, front leading Fed funds in terms of the rate of decline. The impact of accelerated prepayments on residential loans purchased at a premium and on mortgage backed securities, impacted the NIM by 7 basis points for the quarter. So 7 of the 11 basis points in decline were due to that, and most of that came from the residential portfolio, accelerated premium amortization there. The yield on loans was 443 this quarter, down from 452 for the immediately preceding quarter. The most impactful driver of that decline was coupon resets on floating rate loans, most of which are tied to one month LIBOR. Although payoffs of loans at higher rates than the portfolio average, also contributed to that. The yield on loans for the third quarter of the prior year was 547. The decline from the prior year, as you would expect, is primarily attributable to the expiration of the loss share agreements and the covered loan sale. Yield on the investment portfolio was flat compared to the third quarter of the prior year. The decrease of 340 from 361 linked quarter. That decline was due to a combination of coupon resets, lower reinvestment rates, and retrospective accounting adjustments, which accounted for 6 basis points of the decline. Duration of the portfolio remains low at 141. Our current expectation is that the NIM will stabilize next quarter, maybe down a basis point or two, but we shouldn't see the kind of decline we saw this quarter. For the full year, we think we’ll land somewhere between 245 and 250. Obviously all of that is dependent on assumptions we're making about deposit repricing, and our estimates are based on the consensus forward curve, which at the time we put this together, called for a high probability of a cut in October, and a more modest probability of another cut in December, which would have a minimal impact on the quarter in any case. A couple of comments on unusual items included in non-interest income and expense for this quarter, the gain on sale of loans for the quarter included about $2.4 million in gains related to the sale of the Pinnacle loans that we moved to held for sale at the end of last quarter. We took a loss of $3.8 million this quarter related to the extinguishment of some higher cost FHLB advances. Those FHLB advances had a weighted average rate of 272. And we also had a $2.4 million loss on the sale of one commercial REO property this quarter. So all of those, a little bit unusual. I want to take a couple minutes to talk about CECL, and give some guidance about what we expect the impact of CECL to be. So we're currently in parallel run. Based on our current portfolio mix, our economic forecast and other assumptions, we expect the reserve to increase a range of 15 to 30%. So we expect a 15 to 30% increase in the allowance for credit losses. And that will lead to us having a ratio of the allowance to total loans in the range of 55 to 62 basis points compared to the current 47 basis points. We also expect a few million increases of reserve front on new commitments, probably 5 to $7 million. The increase in the reserves primarily related to this transition from an incurred loss model to an expected loss model, and providing for lifetime losses, rather than incurred losses, which we estimate today generally using a 12 month loss emergence period. Obviously all of these estimates are dependent on economic conditions at the time of implementation, any updates to our economic forecast, changes in portfolio mix, and further review and refinement of our models and methodologies over the course of the first - fourth quarter. And we do expect increased volatility in our allowance estimates and our provisioning after implementation of. A couple of words on expenses. Non-interest expense for the quarter and nine months ended September 30, included $2 million and $14.5 million respectively of cost specifically related to BankUnited 2.0. Most of that is professional fees, as well as some severance and branch closure costs. For the full year 2019, compared to 2018, we expect total operating expense to be down about 3 to 4%. To remind you, BU 2.0 is in the implementation phase. If we had not done BankUnited 2.0, that probably would have been a 4 to 5% increase in OpEx. So in total, that's about an 8% swing on $500 million worth of expenses. So we're pretty happy about that. To be clear about how I'm calculating those numbers, this - my numbers exclude the onetime costs related to BU 2.0 implementation, exclude FDIC asset amortization for 2018, and I also I’m not including depreciation of equipment under operating lease, which we don't really view as an operating expense, and that will fluctuate with the size of the portfolio. We also do expect non-interest expense to continue to decline from 2019 to 2020. We’re in the middle of a budgeting season right now. So we'll have more specific guidance about the pace and amount of expected declines on our next call. And with that, I will turn it back over to Raj for any closing remarks.

So before turning it over to questions, I’ll again say, I’m very happy with the way the earnings came out. I think it's a few times ahead of consensus estimates, which is always good. 20% increase in core earnings from last year to this year, which for this particular order, is not bad given the environment. And instead of leaning in and growing aggressively, we're choosing to wait it out, especially on the deposit side. When rates are going up, the mantra in the bank used to be, let's try and get in front of the Fed rate hike that is coming. And so very recently that - everybody used to be scrambling, trying to be a month or two ahead and say, let’s put on deposit stop because the (pulse) is going up. And that sentiment has totally reversed itself and now everyone in the bank is talking about, let's just wait this out because we know rates are going to be lower next month or next quarter, and focus totally on DDA growth. The fact that we grew deposits $482 million for the year, for nine months of the year, and 506 of that 482 is DDA, says it all, that that our focus is totally on DDA growth, which is eventually the long term success driver. So with that, I will turn it over for Q&A. operator, we can start.

(Operator instructions). Our first question comes from Brady Gailey with KBW. Your line is now open.

Thank you. Good morning guys.

Morning Brady.

So I wanted to start - thank you for the CECL guidance, Leslie, but I wanted to ask, do you still have a fairly elevated yield of over 30% on those previously FDIC covered loans? I know CECL, for some banks, can impact that level of accretion. For BankUnited, do you expect any sort of impact to the yield on those previously covered loans?

I do not expect the impact to be material.

Okay. And where did those loans stand in the third quarter? I know they've been shrinking. They were around $180 million last quarter.

Yes. I believe the number at the end of the third quarter - I have it in my notes here. I'm just going to check. I believe it's $171 million on a yield of 35 49 for the third quarter.

Okay. And then Raj, I heard in your opening comments, you talked about how classifieds and criticized were up a little bit. You mentioned the $42 million loan. But can you just go over what - how much did that increase by, and where are those levels as of the end of the quarter?

I think we're at 1.9% for the bank.

Yes.

So the overall number is pretty modest. But it did increase by a little over $70 million, mostly after we got one loan, which we've had on our books for - this client has been with us for …

Seven years.

Seven years, seven, eight years, something like that, and just made a bunch of bad decisions over the last year and a half, and they're paying for it. And so are we.

Is that a credit that you're concerned about? Do you think there's potential loss there?

It's still performing, but the performance of the company itself is not looking good, which means that we’ll probably end up taking some credit action on this in the fourth quarter, or maybe first quarter. We’re in the middle of it right now. We moved it from the line to the work on group and are basically working on the credit. There probably will be some provisions that are forward this coming quarter.

Okay. And then last for me is just on the margin. It was nice to hear that you expect some stability in the fourth quarter. As we look towards 2020, your margin is already fairly below pure average. I mean, do you think it can maintain that 240 next year, or do you think we'll see some continued slippage?

It's really hard to say.

I think there's so much, Brady, that's going to impact that. Our success in growing non-interest DDA, what the Fed does, what the yield curve does. It's very, very premature I think to try to prognosticate that, but we will give some guidance on our fourth quarter call after we get through budgeting season. There’s a lot of variables there.

Yes, that's fair. Thanks for the color, guys.

Thanks, Brady.

Thank you. And our next question comes from Jared Shaw with Wells Fargo Securities. Your line is now open.

Good morning.

Morning, Jared.

I guess maybe looking at loan growth, without - obviously it was a great quarter for mortgage warehouse, but without that, it looks like it would have been a little bit of a contraction in the loan portfolio. Are you waiting to sort of get the lower deposit cost opportunity before we should really see a ramp up in loan growth? Or is that more particular to third quarter and that we could see loan growth accelerate even without the deposit growth accelerating?

I would say this. Production has been in line with last year. The lower level of that loan growth that you're seeing, is almost completely attributable to the early payoffs that we're seeing. And that's a very hard thing to try and guess. So this quarter was particularly painful. Actually first quarter was pretty decent. We were actually happy in the first quarter because we saw a much lower runoff, and this quarter it kind of all caught up, and everyone who we thought was going to pay off in the first quarter, they finally by the third quarter were doing that. So from a production perspective, which is what the pipelines refer to, they're very healthy and are very much in line with what we've seen over the last year or so. It's just very hard to predict where they also come from and it's - in both CNI and CRE, we're seeing a lot of that. The warehouse business, obviously they had an unbelievable quarter, and they continue to do very well. But that's coming both from utilization and from growth commitments too. So it's not just that the utilization went up. And yes, utilization was up, but we also put on a whole lot of new business, new clients, and which is all very healthy growth and coming in at decent margins. So on the deposit side, I will say again, we will continue to choose quality over quantity and keep a very strong line on deposit pricing. that's why I feel so comfortable in saying that deposit costs will come down quite meaningfully, not like the 3 basis points you see here, but a hell of a lot more next quarter, which is what goes into Leslie saying that we feel pretty good about margin being somewhat stable next quarter. So you could have again a quarter where you see more loan growth and deposit growth next quarter.

I would add one thing on the production side too. If we went back and we looked at the last 12 quarters of production and correlated that to growth in any one quarter, the variability of the production numbers is relatively small. 85% of the variability in ultimate net growth really is from payoffs, refinancings, private equity take-outs, and other capital market activities that tend to impact your growth levels off of gross production. So when we're happy or unhappy, it doesn't usually tend to be around production. It usually tends to be around payoffs and refinancings and asset sales.

The other thing I would say, Jared, in this environment, with the inverted yield curve and the challenge that that presents to us, on both sides of the balance sheet, we are a lot more focused on the optimizing of the mix of what's on the balance sheet, and a little bit less purely growth focused right now.

The lowest yielding assets and the highest yielding liability, the spread between those, is at a historically low level, right? There are loans out there getting done at 3%, sometimes even under, and there are deposits that were being generated in the system at over 2%. That’s not a lot of spread to put 8% capital against. You're much better off letting that go and using that capital either at a later date when there’s better curve and better margin, or just buying back stock with it, especially when your stock is trading at 1.1 times, then that's pretty straightforward. You don't need a high flying MBA to figure that out. so it's - we’re looking eventually at capital usage, and what's the best way, and putting on 3% asset and funding over 2% liabilities, and holding 8% capital, is not a very smart thing to do.

Okay, thanks. And then just on the margin, I appreciate the thoughts around deposit pricing decline. Do you feel, as you look at the timing of that, do you need the potential October cut to accelerate the pace of that deposit pricing decline? Or are you already seeing that sort of in the quarter right now?

It's - so internally, we look at deposit pricing almost on a daily basis. I’ll tell you that the number has already come down meaningfully. Even if there is no cut in October and the Fed surprises us, I still expect deposit costs for fourth quarter to be meaningfully lower than third quarter. Now, fourth quarter, when it goes in, it takes a month to sometimes two months before operationally we can actually have a trickle into deposit numbers. So October would help further, take that down, but October will actually help partially the fourth quarter, and it will help more in the first quarter. So we're still working on the September rate cut. So October will certainly help, but if October doesn't happen, it'll still be a meaningful drop in deposit costs.

Okay, great. Thanks.

Thank you, and our next question comes from Ebrahim Poonawala with Bank of America. Your line is now open.

Good Morning guys.

Morning.

Morning, Ebrahim.

I guess just the first question around - I’m sorry if I missed it, but did you provide what the new loan originations are coming on at in terms of the yield?

I'm sorry. Can you repeat that?

Yes. The new loan origination yields? Like what are the new loans getting booked at?

Mid fours this quarter on average.

Got it. And I guess just moving separately and talking about Atlanta, Raj, for you, it is a very market, also highly competitive. Just if you could give some color around the thought progress of why Atlanta, was it just an opportunistic timing from acquiring a team at the time, and should we expect you to do more of these over the coming months or quarters and going into new metro markets that have strong growth prospects?

Yes. So we've been looking at Atlanta for a while, but I would say we're looking at it from a distance. What really got us to take an even harder look was the announcement of the SunTrust BB&T deal, which is going to create a lot of chaos in the Atlanta market over the next two or three years. So we see an opportunity, both on acquiring business, also acquiring good people. And when the right team comes along, you move on it, right? And we found the right team and we acted on it, and we think over the next two, three years, this will be a nice piece of business. Just like a few years ago, we did this with Jacksonville. We don't have any branch in Jacksonville. Our footprint really - there was no branches beyond Orlando. But we found a team a few years ago in Jacksonville, and we built the business around it. And I don't recall the exact numbers, but it’s a few $100 million in loans and deposits that we’ve built, and we’re very happy with what we've done. We're trying to replicate the same thing in Atlanta. We're always looking for good teams that will fit the culture, that will fit the businesses we're trying to build, and not just in Atlanta or in the southeast, but also in the northeast. We've been in discussions with some teams in northern New Jersey as well. That hasn't yet turned up, but we're looking over there too.

Understand. That’s helpful. And just in terms of - would love to get your thoughts on how you think about M&A and consolidation for the sector. I mean, on the one hand, the revenue challenges would imply that we should see more deal making, but again, there's been a significant dislocation in stocks. Like would have to get your thoughts in terms of how you think about it and what you're hearing in terms of when you're talking to other bankers around potential for any sort of deal making over the near term.

Yes. I think there are obviously a number of reasons why there should be deals, where it scales and the regulatory environment that we're in, which might change a couple of years down the road. But then there are a lot of hurdles also, right? The biggest hurdle being that everybody’s stock price is depressed. You can say it’s a relative gains in a stock for stock deal, but human nature doesn't quite work like that. They always look at their stock price and feel like it's down more than everybody else’s, and why would I want to use this? I'd rather just do a buyback or just wait it out. So that is getting in the way of doing deals. And then deals, a vast majority of deals that have been announced over the last three or four years, have not been received well, and the stock of the acquirers are not doing quite as well. The couple of deals that have been announced more recently, which were termed merger of equals, they have their own set of issues. While the numbers might look a little easier to digest, they will have a lot of integration issues, and they're not easy to pull off. So M&A has always been a difficult game, and I think it will continue to remain so. I would think there is still something - I mean, I talk about the yield and we still talk about, we've got to get a deal done sort of this quarter, next quarter. The time to get it announced, you want to not take a risk of an election in getting your deal through. But to the extent deals aren’t announced by April or May of next year, I think there will be even less deals after that in the second half of the year.

Understood. Thank you for taking the questions.

Thank you, and our next question comes from Steven Alexopoulos with JP Morgan. Your line is now open.

Hi. Good morning. This is Alex on for Steve.

Hi.

Morning, Alex.

So on BU 2.0, you mentioned that you're on track for the $60 million in pretax by mid-2021. So when you provided the initial guidance, you also provided ROA targets of 1% and ROE targets of 11%. Are you on track to achieve this under the same timeline as well? Or if not, do you have a sense of when this could be achieved?

Yes. So I will ask you to go back and listen to that call. What we said on that call was, you take $60 million of benefit, which we feel pretty good about achieving, and you add that to the numbers we had announce that quarter, I don’t remember numbers off the top of my head, but if you took the ROA, ROE that the announced that quarter and you added $60 million to it, it gets you over 1% ROA, and it gets you over - I think we said 11% ROE. The - of course keeping in mind that the underlying premise, which is sort of the core earnings of the company, are dependent on the environment, right, what happens with the rate environment and what happens with the economy. We’re going through an interest rate environment right now, and that is weighing on margin. This is not - so say was not a goal, a target set that this - the target was always $60 million in benefit, which we will get there and then we’ll get probably a little better than that. We’ll do. But what happens with the core franchise, what happens to the environment, god forbid there's a recession next year, it's - that lump sum would be 11% and 1%. But if the curve gets better and the economy stays healthy, then we will do that and we'll do probably better.

Got it. Thanks for clarifying that. And also earlier, you mentioned some runoff in the New York rent regulated multifamily. Do you have any observations there in terms of the marketplace, whether it’s evaluation or credit quality in this portfolio?

I’ll let Tom take this.

Yes. I think it's still clearly early in the process to say that. I mean, what you are seeing is evidence of a lesser appetite on investors to buy obviously into rent regulated apartments. When you look at what's happening in valuations, we saw some data the last few days on what's happening with valuations in the free market area, which is increasing more sharply. As you would expect, people are tilting their investment strategy towards free market versus rent regulated. It's early to say what's happening with valuations. We think that there will be consolidation among the property owners, and I think asset owners that have significant critical mass in infrastructure, will be able to manage through this process better than more fragmented investors. And I think we will expect to see sort of consolidation within the rent regulated market. But right now, other than a expected lesser appetite for acquiring properties, there's not a lot trading in the market today to be able to grab a hold of and say, this is sort of a trend line. And what you see in valuations, other than free market valuations, are clearly I think going to move upwards as investors kind of tilt strategy over the next 12 to 24 months thing.

The other thing I would add to that is, I agree with Tom’s comments about valuation, but I would add to that that these loans are cash flowing and performing, and that has not changed.

Correct.

Thanks for taking my question.

Thank you, and our next question comes from Tyler Stafford with Stephens. Your line is now open.

Hey, good morning guys. Thanks taking the question. Hey, you guys clearly sound positive on the funding and deposit cost improvements. I was just curious if you could give us an update, Raj, where deposit costs stood at the end of the quarter, to give us a sense of just the magnitude of improvement you guys have seen so far. And then just any comment on where kind of new CD rates are at this point.

We have not disclosed that in the past, so I don't want to start a precedent. I will give you CD pricing. So CD pricing, our typical 12 month CDs will back off to the 125, 150 range. You are still running a special, but we're not really pushing and advertising it at an eight month at 2%, but will take it down - take that down as well. Money markets are in the 150 range. I would give you a piece of information. I asked yesterday just to look at the month of June for deposit pricing and the month of September. So it's not even October. So just looking at what the deposit costs were the month of June versus September, the decline was 9 basis points. So that doesn't really include anything that happened post September, and certainly doesn't include what will happen in October. So I think the overall decline you will see, will be even higher than that number.

Okay, thanks. Very helpful. And then just lastly for me, I was curious if you can make any credit trend comments around the BRIDGE Energy portfolio and the restaurant franchise division, what you guys are seeing there. Thanks.

So let me talk about franchise. So our franchise portfolio, it's - the large franchise is quick service restaurants, but we also have exposure to the fitness industry. We feel very good about the fitness industry. Return is very, very solid. I have no issues over there. On the restaurants, the quick service restaurant side, we are seeing pressure on labor costs, given unemployment being as low as it is. And we’re also seeing some pressure on gross margins coming from changing customer sort of preferences. Delivery is becoming a big deal, and delivery tends to not include drinks and desserts, which is high margin items. I’m probably getting too much into detail over here, but that's sort of the trend that we're monitoring over there on the franchise side. And the fitness side is very good actually, very, very solid. Energy, Leslie, you want to talk about energy?

Yes. Our energy exposure obviously is all on the BRIDGE portfolio. At September 30, we had about $305 million of exposure to energy in the BRIDGE equipment portfolios. The majority of that, $211 million is in the operating lease equipment portfolio. 199 of that is rail car. $60 million is vessel. 46 is helicopters and some other. That's where the exposure is. We did have a little over $40 million in assets off lease, 930 that we're looking to release. All of those leases - so now with that exception, all of those leases are performing right now. We haven't had any impairment charges that we've had to take. But that's what is there. That’s where the exposure is.

And we’re not looking to grow there. We’re not looking to grow the energy exposure, and we're also taking a fairly conservative view on the restaurant franchise business as well.

And maybe just a little bit more detail to support that. Our overall franchise book is roughly around $600 million. About 68% of it is in quick service food. It’s pretty diversified among a number of concepts. So the number of states, about 28% is fitness, and the remainder would be non-franchise fitness or food businesses, which are typically things like Jiffy Lube and other franchise concepts. And the stressed areas in the business that Raj mentioned, are predominantly on the 68% that's in the food service, less on the remaining 32% that's in the other parts of the portfolio. Great. Thank you for all the detail there. I really appreciate that.

Thank you, and our next question comes from David Bishop with D.A. Davidson. Your line is now open.

Hey, good morning.

Hey David.

Morning.

Hey Raj. Quick question for you Raj. I guess in the past, from demand deposit and non-interest bearing deposits, you’ve sort of set the focus on the year over year growth. I know there’s some volatility in the quarter. Is that 20, 21% growth rate sort of the number to key on, that you're keying in on a go-forward basis?

Yes, I would say, yes. I mean, over the last 12 months, we've had about $700 million of DDA growth and about a $1.7 billion of total deposit growth. And it's especially hard to predict deposit growth, unlike loan growth. Loan growth is a lot easier. But looking at the pipeline, do I feel the pipeline is as strong as it was six months or nine months ago? Absolutely.

Got it. And then it looks like the pace of share buybacks maybe backed off a little bit this quarter. Is that just related to the growth you were seeing in the mortgage warehouse, preservation of capital? Just curious sort of what drove that lower.

We completed the $150 million initial authorization that we had from our board. They gave us another $150 million authorization, but we didn't get that until September. So we’ve now started buybacks under that new $150 million authorization. So it was really just the timing between the completion of the one authorization and the granting of the next.

With just a few weeks in between.

That's what was going on there.

Got it. And then I guess on the narrative, looks like deposit service charges nice growth on a year over year basis. As part of BankUnited 2.0, I know there’s the $20 million revenue enhancements. I guess that falls within that purview. Anything else you can give us to hang our hats on in terms of what else could drive that $20 million of revenue size?

So some of it, the early hits that you were seeing already, which is - you're absolutely right that it's in service charges, it's in treasury management revenue, was basically not waiving what we don't have to waive and collecting on it, better cross sell and better penetration to existing customer base. The new products that we are launching, those are the things that will take time. This is the commercial card program for example. That’s going to take a full year to develop. I don't think we sell our first commercial card until probably third quarter of next year. So that will be the second piece of it. We just take time to develop and it will be fully launched and running in 2021. Same thing on the small business side. We're making some pretty heavy investments in small business as well. And - but for the next 12 months, it's more about investing rather than harvesting the benefit of that.

Got it. Appreciate the color.

Thank you, and our next question comes from Christopher Marinac with Janney Montgomery Scott. Your line is now open.

Thanks. Good morning. I want to drill down on deposit cost and sort of kind of rate specials that either you need to do, or that are being done in your backyards, either in south Florida or New York as you execute the 2.0 strategy.

Deposit competition is still very much clear, both in New York and Florida, and both in commercial and consumer. We’re actually seeing even today, 2% plus debates for CDs. And if you want to grow money market, the way is still in the high ones, if not close to 2%. Where we’re priced at the 150, you actually see runoff, which is what is in front of you for this quarter. We’re hoping next week with the Fed news, that number comes down by 25 basis points. But competitors have been slow to move. There’s still a fairly high level of irrationality in the price.

Raj, does that make it more challenging to execute next year? Or again, do you think the Fed sort of takes care of that for us with these changes?

It all depends on eventually not just what the Fed does, but what the long term does too. Now, the long term, after having come down over the summer, has been someone stable. It's 10 years at 180. I'd love for it to stay there as the Fed reduces and we get some - if not a fast moving curve, at least a flat curve, and that will be helpful. But last quarter, we had a fairly severely inverted curve.

Got it. And then a follow up just on credit quality for Tom or whomever is - would the classified numbers we see in the Q kind of track the stability we saw in NPAs this quarter?

No. I think as Raj mentioned, you're going to see about a $70 million uptick in classified and criticized. And Raj spoke to that earlier, and that will come up to about 1.9% of total loans.

Okay. So no offsets for that is where it was going>

No, that’s net. That’s a net number.

It’s a net number that we were talking about first example.

Got it. Great. Thanks very much.

Thank you. And our next question comes from Lana Chan with BMO Capital Markets. Your line is now open.

Thank you. Good morning. I’ve got two questions, one on the CRE multifamily portfolio. Given sort of maturities that are coming up through this year into next year, how much of a headwind do you think prepayments could be in the growth of that business? In other words, do you expect balances to continue to move down in those portfolios?

Yes, I would say within the multifamily portfolio, specifically in New York, we would expect to see it continue to come down. I don't think it will be prepayments per se because you have - 2020 has a significant amount of maturing loans because the bulk of the portfolio was five year loans and 2015 was sort of a big vintage year. So there's a significant amount of maturities coming up in 2020, and a good portion of that portfolio is within the rent regulated market, although we have at this point, very little exposure around repositioned type loans. So we would expect to see a lot of competition in that market, particularly from the government sponsored lenders, which are taking out a lot of the existing real estate loans now in the long term markets. So I think that we will continue to see that particular segment of the New York portfolio go down in 2020.

Okay, thank you. And just related to that. In terms of the margin this quarter, were there any elevated prepayment penalties in 3Q?

I don't think particularly elevated, no. there were some, but I don't think it had an outsized impact on the margin for this quarter compared to the last several quarters. It was little, but not material to the margin, Lana.

Okay. Just one more question, Leslie. In terms of the stock buyback, should we think about the pace to be similar to the last couple that you've done in roughly three quarters?

I would say it depends on the stock price. We don't try and phrase this on a day to day basis. We generally give our brokers some sort of guidelines and they execute and we get a report every two weeks or so. So if the stock is lower, it's going to go faster. If the stock is higher, it's going to go a little slower, but at the end of the day, we're not thinking like traders or investors. We’re just thinking of this as the return on capital, and it will just happen over the course of the next few weeks and months.

Okay, thank you very much.

Thank you. And our next question comes to David Chiaverini with Wedbush Securities. Your line is now open.

Hi. Thanks for taking the questions. So first on the Atlanta team, could you size the opportunity, and perhaps say how much they were overseeing at their prior firm?

I'd rather not. But again, we're not - we’re going to measure their success over the course of three years, not just over what they do over the next 12 months. But it is a commercial team, I will say that if. It's a CNI team, and they are going to be responsible for not just lending, but also deposit generation in that market.

And you alluded to Jacksonville earlier and that team. Should we think of it as similarly sized in terms of a few 100 million over the next few years?

I think that's hard to say. I mean, we've done well in Jacksonville over the last three years. Atlanta is a great market to be in. we benefit by being fortunately our franchises in excellent markets, and Atlanta is a good market. It’s one of the biggest middle markets. It’s a lot bigger than Jacksonville certainly. It’s one of the biggest middle market segments in the entire country. So our hope is obviously that we do well, but it would be far too early to kind of throw out targets.

Premature to give specific guidance.

Yes.

Got it. Thanks for that. And then shifting to your liability, so looking at the $5 billion of HFLB advances, I saw in the second quarter, the rate was 2.41%. That came down 5 basis points in the third quarter. How long will it take for these to reprice down more meaningfully?

At least a couple of years. So let me back up and explain the strategy around HFLB advances. We use HFLB advances obviously as a funding source. But one of the other things that we use that instrument for is to hedge interest rate - our interest rate risk exposure on the balance sheet. So for example, we recently entered into some hedges to protect us against a protracted downturn in rates, because our analysis showed a pickup in sensitivity if rates were to go down materially from here. And so we purchased some insurance against that with - so we do use that as a hedging tool. So you won't see the cost of that move on a dime because most of it is hedged down and is used as a hedging tool.

So even if we get a couple more rate cuts, it'll still be in this 230.

A lot of it - I mean, the portion of it that is in, will come down, sure. But a lot of that is hedged out over some duration. So effectively it's like fixed rate paper in some cases. So it doesn't move as quickly as say a LIBOR based loan, because of the hedging strategies that we’ve employed.

Got it. All right. That's it for me. Thanks very much.

Thank you. I'd like to turn the call back to Raj Singh for any closing remarks.

Thank you again for joining us. Once again, we're happy with where we came out on earnings, 20% growth over last year is no mean feat in this environment. And we look forward optimistically to next quarter and to next year. We'll talk to you again in 90 days. Thank you so much. Bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect