Ladies and gentlemen, thank you for standing by, and welcome to the BankUnited Inc. fourth quarter and fiscal year 2020 earnings conference call. At this time, all participants’ lines are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you need to press star, one on your telephone. Please be advised today’s conference is being recorded, and if you require any further assistance, please press star, zero. I would now like to hand the conference to your speaker today, Susan Greenfield, Corporate Secretary. Please go ahead, ma’am.

Thank you Victor. Good morning and thank you for joining us today on our fourth quarter and fiscal year 2020 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, 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 the COVID-19 pandemic. 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. Information on these factors can be found in the company’s annual report on Form 10-K for the year ended December 31, 2019 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.

Thank you Susan. Welcome everyone to our earnings call. Thanks for joining us. I’ll start by talking a little bit about the environment and the economy, then we’ll get into our numbers. Since we last talked to you three months ago, really three big things have happened in terms of reduced uncertainty, and reduced uncertainty is a good thing, always a good thing. The first and foremost, and probably the biggest news of last year was the vaccine, which came out in November is now being administered. Obviously we had the election uncertainty last time - we’re past that now. We also had the stimulus which, compared to the other two news, is small news but nevertheless positive news. We weren’t expecting a stimulus to get done until the new administration takes over, but I’m glad it was passed a few days--a few weeks ago. With that, as I look through 2021, it feels like a year with a very, very strong potential in the second half of the year, possibly starting as early as second quarter, but I do see a slow first quarter as all this good news is great, but it actually has to get converted into reality. The biggest risk obviously still remains vaccine distribution and, to some extent, a new variant of coronavirus. There is still some uncertainty around it, but a hell of a lot less than this time 90 days ago, so we’re feeling very good as we put together our budget for the year. We basically took assumptions that first quarter is always a slow quarter for us, but this year will be slow as well for all the reasons I just stated, but then pipelines start to build up and we start executing on a growth strategy somewhere in the second…

Thanks Raj. Let me start with deposits and a little bit more detail on the deposit book. As Raj mentioned, total deposits grew by $899 million for the quarter and non-interest DDA grew by $219 million for the quarter, so the deposit mix continues to improve. We allowed higher cost deposits to run off this quarter, which we’ve continued to do for the last few quarters as time deposits declined by $1.1 billion for the quarter. A little bit more detail on cost of funds. The total cost of funds--cost of deposits declined to 43 basis points this quarter. On a spot basis, the APY on total deposits was 36 basis points at December 31, which was down from a spot of 49 basis points at September 30, and compared to last year at December 31 it was 142 basis points, so big continued progress there. The spot rate on interest-bearing deposits was 48 basis points as of December 31 compared with 65 points at September 30 and 171 basis points a year ago, so we’re seeing reductions in cost of deposits across all lines of business, across all products. That continues to be a very broad-based trend. As we think about December 31, 2020, we had $1 billion of CDs in the book at an average rate of 1.61% that had not yet re-priced since the last Fed cut in March of 2020, so in the first quarter of this year we have a significant amount of that - just under $800 million - that will re-price in this quarter. Additionally, some CDs that matured and re-priced early in the cycle will also re-price down again at their next maturity date, so there’s a very significant difference between what these will re-price at. Our current rates are running about…

Thanks Tom. I’ll start with everybody’s favorite subject, CECL and the reserve. Overall, the provision for credit losses for the quarter was a net credit or recovery of $1.6 million compared to a provision of $29.2 million last quarter. That $1.6 million consisted of a $1.2 million provision related to funded loans and a recovery of $2.9 million related to unfunded commitments. The reserve, the ACL declined from 1.15 to 1.08, 1.08% of loans this quarter primarily because of charge-offs, which is exactly what we would expect to happen under CECL - as charge-offs are taken, the reserve would come down. Slides 9 through 11 in the supplemental deck provide some details on changes in the reserve and the composition of the provision and the allowance. Charge-offs totaled $18.8 million for the quarter, which reduced the reserve; $13.8 million of this related to the write-down to market of some loans that we sold during the quarter or that were moved to held for sale right at quarter end, and those were sold in January. $34.1 million, and all of the rest of this is stuff that ran through the provision, the $34.1 million decrease in the reserve and provision related to the improvement in the economic forecast. Offsetting that was a $32.8 million increase related to increases in some specific reserves and net risk rating migration. We had an $11.4 million reduction in the amount of qualitative overlay - this is exactly what we would expect. We expect that qualitative overlay to come down as more facts are known about individual borrowers and more of that gets captured in the quantitative modeling. We also had an increase of $15.2 million related to more conservative modeling assumptions that we’ve made around behavior of certain residential borrowers that had been on payment…

Thank you Leslie. There’s so much information to give you these days that these calls end up taking way too much time in the first half, but hopefully as the economy returns, have to do less talking and take more of your questions. But let me turn it over to you guys and take questions now. I see a line already, yes. Operator?

[Operator instructions] Our first question will come from the line of Ebrahim Poonawala from Bank of America. Your line is open.

Good morning.

Good morning.

Good morning.

I guess first question, just around the product mix, Raj. Thanks for the guidance around the non-interest bearing deposit growth. When I look at BKU pre-COVID, I think the biggest gap when you look at ROE was driven by the cost of deposits, and given the inflow of liquidity for the entire industry, it makes it a little bit challenging to figure out [indiscernible] core relationship deposits that are going to stick around, when rates go up. Just talk to us in terms of your comfort level in terms of the clients that you brought on in the last year and the last few years and how that should translate if and when rates actually go up, and BKU’s ability to deliver peer-like or better than peer ROE [indiscernible]?

Yes, so listen - what you guys see is our push for growing DDA and bringing down cost of funds. What you don’t see behind the scenes that I’m really pushing hard in the company is make sure we have the right clients. For the last almost six months, every deposit call that we’ve have, we have one every month, the topic of discussion is how to make sure that when rates go up, because they will someday, maybe two years out but eventually they will go up, that we have lower betas and lower pain at that time than when rates went up last time around. We look to various things - you know, parked money, single accounts or a few accounts type behavior is generally an indicator that either the money will leave or it will have high beta, so we’re trying to de-stress and push those accounts out. We’re also trying to by industry, select industries that tend to be less--have less beta, so we’re doing all of those things. But there is--you don’t really exactly know how a client or a relationship will behave when rates rise up. You can guess, you can look at how they did last time around, you can look at those industries, you can look at their customer behavior and how much business--how much payments did they run through the bank, and those are all indicators, but at the end of the day they are indicators. I think we’re working on all those fronts and trying to not work for just this quarter and this year, but really focus on 2024 when rates rise up. But eventually, I’m very curious myself to see how this will eventually all break out. DDA is obviously a cure for everything. At the end of the day, DDA has zero beta. That’s what you--you know, if I could have the entire deposit base be just non-interest DDA, that’s silly but I would love for that to be the case, so as long as we keep delivering on that, that’s our ultimate insurance from pain in a rising rate environment.

Got it, and just separately, Raj, around the buybacks, I guess you’re back in the market or at least you’re willing to buy back stock. Just tell us in terms of your appetite, will this seem like a modest amount in terms of scaling the buybacks up, and then just talk to us in terms of your outlook around M&A, does anything change coming out of this versus how you viewed M&A pre-COVID.

I don’t think our philosophy around M&A really changes. I think M&A is a tool to be used carefully, and the idea shouldn’t just be let’s get bigger, the idea should be let’s get more profitable. Sometimes M&A does make sense, but if you can build it yourself, we’d rather be patient and build it ourselves. But certain things cannot be built themselves, and for that M&A is fine. My M&A view is really--my philosophy hasn’t changed. I think what has changed is the environment is very different. Last year there wasn’t much M&A until the fourth quarter, and now I think as you’re coming out of this fateful period, I do expect more M&A, especially in the midcap space, maybe not so much in the very large bank space. But yes, this year and maybe next year, we’ll be active on the M&A front. We’re here to talk to anyone and everyone. Any deal that makes sense, we will talk, but we don’t lead with that.

Got it, and on buybacks?

On buybacks, our Board, as you know, has given us always $150 million at a time in terms of authorization, and I think they want to just stick to that rhythm. Our budget that we presented to them only less than a month ago includes buybacks, much more than the $45 million that we’ve just gotten authorized for. My guess is once we get through this $45 million, there will probably be another $150 million. When we get through that $150 million, there will be another $150 million and so on. It really is about managing your PCE to PA targets, which we’re basically going to go back to where we were prior to COVID, which is trying to target 8% PCE to PA over time.

Got it. Thank you for taking my questions.

Our next question comes from the line of Jared Shaw from Wells Fargo. You may begin.

Hi, good morning. Maybe sticking, I guess, with the deposit and NIM discussion, it’s great to see the reduction in your funding costs there. As you look at that next round of CDs rolling off, do you think that you need to start holding onto some of those, or should we still expect to see the actual level of CDs decline as well as DDAs increase, or will the mix shift come about more just by DDAs outgrowing the CDs?

I think CDs will continue to decline, not just because of the way we’re pricing it but also because of customer preference changes. People don’t really want to lock up money in such a low rate environment, so a lot of money is just flowing into money markets. DDA growth is separate - that’s more about our business development efforts that have been singularly focused on DDA growth, and they have panned out for the last many quarters now. That will continue, and overall deposit costs will keep dropping.

Then on the CRE side, clearly you still have the headwind of pay-downs and payoffs there, but on the loans that are you writing, how are you seeing changes in pricing and structure? Is that moving to your advantage, or is it still a pretty competitive market for new paper?

Tom, why don’t you take that one?

Yes, I would say when you look at the CRE market, what we’re predominantly doing new today tends to be--in a couple of sub-sectors, it tends to be in the industrial market where we have a good level of credit appetite for industrial property. We’re seeing good opportunities in Florida multi-family, where those markets are tending to do extremely well. I think there’s been some structural competition, I would say in the last quarter, perhaps more than we saw in the third quarter. We are seeing lifecos and other banks return a little bit more to that market, but at this point when we look at what we originated in the fourth quarter, what I would call relationship-oriented business, I still think we’re seeing good quality structure and good rates in the market. Our pipeline in those segments heading into 2021, I think is good and I think clients have a good level of confidence in our ability to execute on transactions, and I think because of that we’re still seeing what I would consider to be reasonable pricing in terms on the asset classes that we’re emphasizing in 2021.

Okay. Then just maybe more of a modeling question on the expenses and the growth, the growth outlook that you’re giving is full year over full year, I’m assuming? How should we be thinking about first quarter comp expenses with some of those moving parts that you called out this quarter?

Yes, the guidance was full year over full year. As you know, in the first quarter comp expense is always elevated by several million dollars because of just the timing of payroll taxes and HSA accounts needing 401-K contributions, and all of those things that tend to be front-loaded, so it will be higher in the first quarter, Jared, as it always has been.

So those higher levels of incentive that we saw in fourth quarter should roll forward?

Yes, those things should not recur, but we will see elevated comp expense in Q1. We always do.

Yes, okay. Then finally for me, when do you think you could see the CLO portfolio back to par? Is that something you’re expecting this year?

It’s almost there. It’s difficult for me to predict. I can tell you that spreads in the bond market are tightening everywhere, which is not a good problem to have, to be honest, but that will contribute to that coming back in. We’re almost there now, and I don’t see any reason why it wouldn’t continue to pull to par, Jared.

Great, thank you.

Our next question will come from the line of Bradley Gailey from KBW. You may begin.

Yes, it’s Brady. Good morning guys.

Morning Brady.

I wanted to close the loop on buybacks. Your stock has done pretty well recently. I don’t think you’ve ever been a re-purchaser up when the stock has been at this level, but it doesn’t appear that that’s going to stop you from re-engaging in the buyback of the stock. Relatively speaking, it’s still, what, only one and a quarter times tangible, so it’s still pretty cheap, but I just wanted to make sure that was the case.

Brady, I think we have bought our stock in the high 30s--

Yes, absolutely.

I would like to buy it lower, but I think we have. We will be opportunistic. I still think there will be volatility in the stock, not our stock but everyone’s stock, so we will use that to our advantage. We’re not going to just go out and do the entire thing tomorrow, so we will be opportunistic. We will set up a grid--you know, Leslie and I don’t do this on a full time basis, we just give some instructions, we set up a grid, and we just let it run for a few weeks. That’s what we’ll expect, and if the stock is lower, we’ll buy faster, and if it’s higher we’ll buy slower.

Okay, and to clarify, Leslie, your NIM guidance is the reported NIM, not the NIM ex-PPP or anything like that, right?

That’s correct, Brady.

Okay.

Yes, we will get some--we expect that we’ll get some lift from PPP in the first quarter, given how we think the forgiveness is going to go on those loans, but that’s correct.

Okay. Then lastly for me, I just wanted to hit again on expenses. I believe I remember you guys guided for flat expenses on a linked quarter basis this quarter, and they’re up $14 million to $15 million, which I get. I know you guys called out this for special mention items, so I get that; but the guidance for this year, 2021, the mid single digit increase, I’m a little surprised by that. That seems a little--

That’s in overall expenses, Brady, not just in comp, so technology is probably going to be the line item it increases the most on a percentage basis actually, Brady, as we continue to invest in technology. The other thing that’s baked into that, which hopefully won’t materialize but it is baked into that number, is an assumption that [indiscernible] and recovery costs are going to be elevated in 2021 as we move through the pandemic and work with these borrowers to try to get through the pandemic with them, and hopefully that won’t materialize. But some of that is baked into that guidance as well, Brady.

I’ll add to that also, Brady. You know, it’s great to see so much in operating business come over in a year, but the back end of that is then you have to--you have a lot more wires, a lot more [indiscernible], a lot more payments happening, and you start adding a couple of people in the wire room, a couple of people in fraud, a couple of people in DSA, all related to the growth in DDA that we’ve had. There’s some of that also happening, but technology is a big one. We have been investing over the last 18 months or 24 months in technology - some of those expenses are coming through, but that’s really the future of the company. Some of the success that we are having is also based on some of that technology spend that we’ve done, but it’s really coming in and hitting the P&L on a full basis right about this time.

Yes, and I would remind you that these expenses--these expense increases that we’re guiding to won’t happen if we don’t have the accompanying revenue increases. They’re predicated on some assumptions about growth in revenue, and obviously that’s again another good problem to have.

Then BankUnited 2.0 was very successful, you all did a great job with that. Any thoughts on BankUnited 3.0?

If you are thinking of 2.0 as an expense exercise, then the answer is no because you can really get very shortsighted in saying, let me just eke out a little more expenses and then before you know it, you don’t have a future left, so investing in the future of the company is as important as being mindful on where you can be on expenses. We’ve done a good job. We took $40 million of expense out, but we did not say that we would not invest in the future. I think if you think about 3.0 more as the continuous transformation of the company, the answer is yes. Will we have fewer branches in the future than today? The answer is yes, simply because that’s where the business is headed. Will we have more automation in the company than even what 2.0 was about? The answer is yes. Would we actually continue to push on all the revenue aspects of this - you know, increase our commercial card portfolio? The answer is yes. But just purely as an expense exercise, I think we’re not an outlier when it comes to expense ratios - you know, expenses to assets, expenses to loans, whichever way you want to measure it. I want to be mindful and make sure that we’re investing for the future as well.

Got it, thanks guys.

Thank you. Our next question comes from the line of Christopher Keith from DA Davidson. Your line is open.

Thanks, good morning everyone.

Good morning.

I just have some questions. I want to dig a little more into the loan growth. I appreciate all the segment detail, but I just want to think a little bit about demand and your comments on loan growth really starting to begin to return to a normalized level in the second quarter, but then really improving in the back half. I think that it’s clear, Raj, the comments you made about some of the positive news needing to materialize, but I’m also curious on the impact of the new PPP on C&I loans. Is that something that your customers will be a beneficiary of, and if so, does that dampen C&I demand, and for how long?

We’ve all been sitting and talking the last few weeks--few days about how big PPP 2.0 is going to be, and we don’t exactly know but I don’t think it will be anywhere close to the first round. The first round was $850 million for us. My best guess is it’s going to be maybe half of that, so it’s not a very large number. The old PPP is getting forgiven and the new one is coming on, so I don’t think net it’s really going to move the needle that much, but it will help our clients tremendously so it is a great thing that the federal government has done. We’re very supportive of it, and we’re trying to do as much as possible, but we just don’t see that huge--I mean, our phones were ringing off the hook back in April. That’s not the case right now. Our comments about--you know, economic activity will pick up only when there is a certain level of vaccines that get administered. We think it’s probably still three months away, but when that happens, when economic activity picks up, it’s not just new loans pipelines will firm up but also our existing lines. We’re at the lowest usage in the history of the company. We’re at least 10 points behind in our commercial lines than what we would expect in normal times. When that starts to normalize, if you don’t even originate anything, if it’s just that [indiscernible], that’s $700 million of growth that we will get without really underwriting a new loan, but that’s all linked to economic activity. Economic activity has to pick up, and I think it’s still probably three months away.

Yes, I would add to that, that all of the guidance we gave is predicated on an underlying assumption that we continue down a pretty steady path of economic recovery. Should that not materialize, obviously our guidance may be a little too optimistic. Should things recover much more quickly and faster than we assume, then the opposite would be the case.

Yes, I would also add that when you look at the PPP program for the second draw, the bar and the qualifications are different. One of the biggest bars that you have that’s different than the first program is that you have to have a 25% reduction in revenue in any one quarter, so the maximum amount of the loan is now $2 million versus $10 million, and the 25% bar is really going to relegate this to the most heavily impacted industry segments. Just by the [indiscernible] obviously we have some of those, but the vast majority of our portfolio, as you can see, is obviously not in heavily impacted areas, so the number of clients that will be eligible to take advantage of it, you also have to have used up all of your round one expense fundings that you got, in a way that you can indicate that you are compliant with how phase one was used. There’s some natural parameters around that, that will not lead to the same kind of demand numbers that we saw in phase one.

Got it, great. Thank you. Then I was just also hoping to get some insight from you on the multi-family marketplace, particularly in New York. Obviously you continue to see run-down in that portfolio. I’m just curious, are borrowers getting--what is, I guess, triggering them leaving the bank? Is it that they’re getting to the end of their term and they’re looking to take advantage of the lower rate environment, and if so, those that are walking away, are they--do they have healthy debt service coverage ratios and you’re just allowing them to walk away for a strategic reason, or maybe just some color around that.

Yes, so we started a couple of years ago, obviously, with a strategy of reducing our exposure in the New York multi-family market, so when we--you know, 2021 is kind of the last five-year term of the original vintage loans that we had put into the market. When we look at clients that are leaving, these are predominantly relationships that we are not interested in maintaining because the overall health of the market with the changes in rent regulation, some of the changes that are going on in the economy of New York, you’re seeing rising cap rates which is putting pressure on valuations, and you’re seeing extremely thin debt service levels in some of the properties that we’re exiting out of. I think this is a healthy rebalancing of our portfolio, and multi-family will continue to run down in 2021 as the last group of vintage of the 2015 production comes to maturity in 2021.

Got it, great. Then just last question on deposits and the impact of the new PPP round two and the additional stimulus we’ve seen, do you anticipate some of this excess liquidity to eventually start to run down? Do you expect your customers to kind of hold onto their own liquidity throughout the course of ’21, and what kind of impact are these new programs having on potential future loan growth--or I’m sorry, deposit growth?

You know, that’s a--obviously each business that applies will be a little bit different, so it’s hard to generalize that at this point because we haven’t processed the first new application yet. It’s difficult to forecast what that demand is going to look like and then what ultimately the retention of those dollars going to look like. I would suspect that given the bars that are around the program, meaning predominantly the 25% drop in revenue, you’re going to see--not just for us, for everybody, these are for every bank, you’re going to see a higher percentage of borrowers that have come through more distressed times, so I suspect that the--you know, whatever we would phrase as the liquidity build-up that happened in phase one, you’re going to have borrowers who did not need a substantial part of the liquidity and held it for longer periods of time are probably not going to qualify for phase two. I think the dynamics of deposit funding and deposit retention under phase two are going to be fairly different than phase one, but having said that, we haven’t seen any applications yet, so it’s hard to say.

It’s a great question.

We’re seeing them now. We will be executing and opening up the program this week, but we haven’t seen any of the--enough of the details to be able to forecast what we think that might look like.

Got it. Thank you so much for taking my questions.

Our next question will come from the line of Stephen Scouten from Piper Sandler. You may begin.

Yes, good morning. Thanks. I guess maybe a quick housekeeping question. I’m wondering, Leslie, if you have the amount of PPP fees that were recognized this quarter and the average balances on the PPP?

The fees recognized were about a million dollars, Stephen, so really not very impactful this quarter. I don’t have the average balance in front of me. It really didn’t change much quarter over quarter--

Yes, I guess it’s not changed much.

Yes, we only had $48 million forgiven, so the average balance is somewhere around $800 million for the quarter on PPP. I think I said there’s about $11 million in those deferred fees left to be recognized.

Great, okay. Thank you. Then maybe thinking about the net portfolio migration you saw this quarter, obviously you walked through Slide 10, that’s very helpful. But I’m wondering what you all saw on the CRE trends and maybe multi-family retail in particular that led to some of these jumps in the sub-standard or current categories, and if you think that’s an issue that could persist based on what you’re seeing today.

Yes, I would--you know, all real estate is local, right, so I would say that when--it’s interesting, I went through an analysis of that last night. When you look at predominantly what happened in that category, it’s multi-family and mixed use, multi-family retail that is sort of all around NYU, so some of our biggest challenges and what we believe are short term in nature is the lack of students. A lot of these properties and retail properties cater around the Washington Square Park area to NYU students, and we’re not seeing those students physically return back onto campus and we’re not seeing those retail establishments doing well, so what we saw in migration this quarter was predominantly property that is around the Village area around NYU. We don’t see that--you know, that’s kind of the concentration that we had in that area, so I don’t think that’s reflective of what’s going on in the entire New York market. I think it’s a very micro area and obviously we’re hopeful that when the vaccine is out and students start coming back to campus, that some of those things, some of those conditions improve.

Okay, that’s extremely helpful. Thank you. Then just on loan growth, the kind of mid single digit range, you noted, I guess, that 1Q should still be pretty tepid. I’m wondering, does that include the same pace of Ginnie Mae buyout activity, or would that be more toward the core commercial side of things that you think could pick back up, that would drive that growth?

Yes, that’s in there also, Brady. I think we do think this is a good time to be in that business and we see opportunity there right now, so I do think the Ginnie Mae buyout portfolio will contribute to growth for sure in 2021, at least as we see the world today.

Okay, and then just last thing, going back to expenses, I just wanted to confirm that expense guidance, is that off of the--I think it was $123 million expenses this quarter, or is that off of some sort of base that excludes the jumps in salaries on the [indiscernible] and so forth?

No, it’s off the annualized--I mean, it’s off the annual expense number, Brady, all in. I know--I get there’s a lot of moving parts in there, but that’s what that guidance is based off of.

Okay, so the $457 million expense rate--

Oh, I’m sorry Stephen. Sorry, my mind--I’m losing my mind.

No, you’re fine. That $457 million--

Bradley!

That’s right, that’s right. We’ll answer to whatever, it’s not a big deal. So it’s based off of more of that $457 million number?

Yes.

Okay, perfect. Thank you guys so much. I appreciate the time.

Our next question will come from the line of Dave Bishop from Seaport Global. You may begin.

Thank you. Hey, good morning.

Morning Dave.

Following up on Brady’s or Stephen’s, or whoever that was before me, his question--

Bradley, it was Bradley!

Bradley! Just to clarify, make sure I heard it right, so--and I appreciate the continued disclosure in the slide deck there. So the increase in that sort of substandard accruing multi-family, if I heard that right, that’s centered within that portfolio, sort of that retail mixed use or maybe the multi-family in and around Washington Square Park, NYU in New York City? Is that the case?

Correct.

Got it, got it. Then Leslie, I think you noted in the preamble in terms of just the trends in migrations in terms of CECL and the allowance for credit losses, I noticed a little bit of uptick in terms of how the assumption changes in regards to the residential loans. Just curious what’s driving that, are you seeing any sort of particular weakness in various areas? Just maybe some commentary on that.

I think where that comes from is as our credit folks look at the residential portfolio and the population and loans that either still are or were on deferral, they feel like--what we did was we modeled those a little more conservatively this quarter until those loans that are rolling off of deferral establish a little bit longer trajectory of a regular payment history. My hope is that we get six months down the road and that gets reversed out, but we’ll see. That was just a conservative assumption that we made because we still feel there’s some level of uncertainty as to whether all these residential borrowers that are rolling off deferral are truly going--the ones that didn’t keep making payments while they were on deferral are truly going to establish a good history of regular--making their regularly scheduled payments. We were just a little more conservative in how we modeled those loans this quarter.

Okay, so it wasn’t anything in particular in terms of deterioration in terms of any underlying housing--

No, and it’s not really that we’re seeing a lot of that, but they just--you know, a lot of these guys just have not established--re-established a payment history, so we wanted to be a little more conservative until they do.

Got it, got it. Then maybe a question for Tom or Raj - you noted the outlook and hope for double digit, maybe mid-teens DDA growth. Is that predicated on the ability to get your cash management, treasury management team on the ground in front of clients, or you think you can still maintain or sustain that growth in this virtual world that we’re all living in these days?

Yes, we can do that in a virtual world. The real world opening up is more needed for the loan side, but on the deposit side, as we have been doing all of last year, we’ve found a way to keep developing the business even if it’s virtual.

Got it, thank you.

And part of it is the certain industry segments that we have chosen to specialize in, some of them are lending themselves well to this type of selling methodology, and we’ve developed products and service capabilities around these, so it’s not like you’re having to sort of start new relationship segments. We’re deepening a lot of the traditional ones that we’ve been in, where we have strong service models and good capability and relationship managers with the contacts in those sub-segments, so it makes it far easier to continue to develop this business in a virtual atmosphere.

Got it, thank you.

Thank you. Our last question will be from the line of Brody Preston from Stephens. You may begin.

Hey, good morning everyone.

Good morning Brody.

I just wanted to--sorry to beat a dead horse, Leslie, but just on the expenses, just taking your commentary around the variable comp from earlier in the call and the guidance you gave around merit-based increases for 1Q, it sounds like the variable comp may come down a bit in the first quarter but then you’re also going to have merit-based increases on top of that, so I guess all-in when I think about that salaries and benefits line item, should that stay relatively flattish to fourth quarter, just factoring those two data points in?

It will be higher, Brody, because of other elements that always hit in the first quarter, such as--you know, we always have a big flood of payroll taxes, we see [indiscernible] HSA accounts, 401k contributions are front loaded, so--you know, and then it will come down quarterly after that. It’s in spite of the merit increases. But the first quarter comp is always higher because of those front-loaded tax and benefit costs.

Okay, got it. Thank you for that. Then on the securities portfolio, I’m sorry if I missed it. I just wanted to get a sense for what new securities yields were in the fourth quarter in terms of what you’re putting on, and could you remind me, I know the duration of the book is relatively short, but what percentage of the portfolio still needs to re-price down to current levels or what you’ve seen over the last couple quarters?

Yes, I would say two things about that. I do expect pressure on securities yields again in the first quarter. Based on what I know today, I would think they would be down 5 to 7 basis points from where they were in the fourth quarter. Part of that is spreads are really tight right now, and I don’t know if that is going to persist or if it’s not going to persist, but even since mid-December spreads have really come in a lot across all segments of the securities portfolio and the bond market that we participate in, so things are coming on at lower yields. As far as coupon resets, there are still some left. We do have some securities in the book that re-price annually, but not as many. I do expect some pressure on those yields, so again in the first quarter as that portfolio turns over. The duration is pretty short, so sometime over the course of 2021 I would expect that to stabilize, but it will come down again in the first quarter.

Okay, thank you for that. Maybe this is just a larger picture question as it relates to the securities portfolio, but you tend the run the securities book a little bit larger, or quite a bit larger than some of your peers, I guess. As I think about, Raj, maybe BKU 3.0 or something like that, have you given any thought to maybe trying to mix shift the earning asset base more heavily into loans, because it would really allow you to kind of right-size the ROA profile of the bank.

We’d certainly love to do that, and if the loan demand is there to allow us to, we will.

Yes, we need loan demand, we need economic activity to safely deploy into high yielding loans, but there is a lot of pent-up demand in this economy. This is a very artificial recession unlike any we’ve ever seen. It went down fast, it’s coming up fast. I do expect in three, four--you know, pick a number of months, the economy to be in a very different place, and that’s when we’ll have our opportunity to grow loans. Just wishing that we’d grow loans in this environment is--you know, it’s not a great strategy. It is just--we would love for us to swap out our securities for more loans, but I think you have to wait for the right environment to do that.

Right, I understand that. I’m just thinking from a liquidity perspective, your period-end cash balances here aren’t completely out of whack relative to historic levels, so as I think about how to fund the mix shift on the balance sheet in ’21 and ’22, understanding that you’re trying to get really good deposit growth, but it just seems like there’s an opportunity to really mix shift the earning asset profile, just given how short the duration of the securities portfolio is. I would assume that that’s something that could be potentially attractive.

Yes, it absolutely is, and that’s one of the reasons we’ve kept it very short, because we don’t want to be hamstrung with long-dated securities when the time comes to actually start investing on the loan portfolio.

Okay. Then one last one that I had, and I’m sorry if you covered this already, but the hotel portfolio, the criticized and classified, I think make up 82% of the balances, and a big chunk of that - 70% of total hotels - is in substandard or classified, and that’s a decent step-up from 3Q. I just wanted to get a sense for what the plan was moving forward. Would you consider selling these loans, or when would you expect [indiscernible] to occur? Are these loans still paying?

Most of them are still paying. Admittedly, some of them have been modified to an IO structure for a period of time. I think we’re fairly optimistic with respect to that portfolio in terms of recovery of these businesses, particularly the Florida leisure segment.

Yes, I would agree with that. When we look at the client base that we have in that segment, these are primary depository relationships of ours, they’re generally strong asset owners. As Leslie said, the payments have continued. We see recovery each month in this segment, and it’s not difficult to imagine an environment where you get a vaccine fully out in the marketplace and the predictions for travel later on towards the back end of the year are actually pretty strong. These hotels could rapidly recover because with the exception of one or two, our hotel exposure in Florida is predominantly leisure, it’s predominantly beachfront, and as I said, we’re now seeing occupancy rates in places like the Keys and the west coast up in the 60%-plus range. I think the greatest opportunity for this, the risk rating and the economic scenario to change for us is you start to see more of a--you start to see the vaccines get out and people start to return. These hotels are not that far away from being able to be back up in the 70%, 75% range and have stronger ADRs and F&B business. Most of these hotels, if not all of the Florida ones are primary relationships where we have significant deposits and significant treasury management business, and hotel owners and operators that have performed well for a number of years.

I’ll just add as a test case of one, when I look at my own family’s desire to go for a vacation, a very strong desire to go away for a vacation this summer, I feel very hopeful about this industry in the second half of the year. Now, that’s a test case of one - that’s just my family, but I think a lot of families are going to be--post vaccination, it will be a different place for entertainment and hospitality.

Agree.

I will tell you that a lot of Florida hotels are very full on the weekends because I’m staying in them, and I’m not the only one there. I don’t know what they’re like on Tuesday nights, but I can tell you what they’re like on Fridays and Saturdays.

Just anecdotally, I spent the weekend at one on South Beach over the weekend, and it was 100% booked and every restaurant on Miami Beach was packed. You couldn’t get reservations for two or three weeks at better quality restaurants. The Beach was 100% booked over the Martin Luther King weekend, so there is health coming back to the markets and I think that there is pent-up demand as soon as we get a more full rollout of the vaccine. That’s what our hotel owners also believe.

Understood. Thank you very much for taking my questions. I appreciate the time this morning.

Absolutely.

Thank you. I’m not showing any further questions in the queue. I’d now like to turn the call back over to Mr. Singh for any further or closing remarks.

Thank you very much for joining us. We’ll talk to you again in three months. Stay safe.

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