BankUnited, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Bank United, Inc. Third Quarter Earnings Conference Call. At this time, all participants 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 will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker, to Susan Greenfield, Corporate Secretary. Thank you. Please go ahead.

Thank you, Dylan. Good morning, and thank you for joining us today on our third quarter results conference call. On the call this morning are Raj Singh, our Chairman, President, and CEO, Leslie Lunak, our Chief Financial Officer, and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Security 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 limitations, those relating to the company's operations, financial results, financial condition, business prospects, growth strategies, and liquidity requirements. including as impacted by the COVID-19 pandemic. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company's annual report on Form 10-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 the earnings call. It was 90 days ago when we last talked to you. We're still in the same format. I'm happy to be back in Melville, at least on a part-time basis. And Tom and Leslie are in Miami Lakes. It's nice to get away from our Zoom calls. Last we spoke, the environment, I just want to remind everyone where we were. It was July. We had seen the worst of the virus behind us. There was a recovery. New York was doing well. Florida was beginning to spike in cases. and spiked pretty sharply and we were quite nervous at that time. So the good news is that spike was controlled and numbers came down and we did not see an impact on the economy in Florida. The economic activity continued well. Here we are 90 days later. I feel like this is deja vu. We're seeing a different kind of spike. This time not so much in Florida, not so much in New York, but generally overall in the country. So I'm hoping this is just deja vu, and what follows on the economic front will also be deja vu, and we will not see much of an impact like it happened three months ago, and then this becomes a non-event economically speaking. But I'm also hoping that this is not Groundhog's Day, and we are not talking about this 90 days down the road again. So with that, I would like to just say that our stance generally in the economy is cautious optimism. There's a number of things that have gone in the right direction over the last quarter, if you compare what happens 2Q to 3Q. So we're very happy and optimistically looking at those numbers. At the same time, we are taking a big dollop of caution, given all the uncertainty that still exists with the virus, as well as the political realities. We have an election in less than a week. We have a stimulus bill that everyone's been talking about forever. It doesn't look like it's going to get done anytime soon. So there's a fair amount of uncertainty out there, which adds to our cautiousness. With that, I will quickly jump into our earnings, walk you through how we did over the last three months. We came with $66.6 million of earnings over the third quarter with $0.70 a share. If you compare it to last year, we were at $0.77 a share this quarter, and just compared to last quarter, we were at $0.80. I think the street expectations were in the low of mid-60s, so slightly better than expectations. Now, given the fact that this is about six months from the biggest shock to our economy in living history, I think that these are pretty decent numbers based on what has actually happened in 2020. Our PPNR continues to grow nicely year over year, though it did decline a little bit from last quarter, and Leslie will talk to you. There isn't any one big thing that points to it. It's just a million here, a million there, which adds up to a slight decline compared to last quarter. But over the longer term, compared to last year, our PPNR this time was $115 million. I think the third quarter of last year was $102 million. And for nine months, our PPNR was $323 compared to $309 for nine months last year. Of all this said, you know, from quarter to quarter, there can be volatility in, you know, good direction and bad direction. You shouldn't really look at any one quarter of annualized. You should at least have a 12-month view. And, you know, that kind of evens out seasonalities and add-on things that happen from time to time. The big story here before I talk about credit on the balance sheet is about deposits. We, again, had a very strong deposit growth order. But what's more important than just the total growth in deposits is really what kind of deposits came in. So we had DBA grow by $906 million. That's a 15% growth over the last quarter. And now our deposits, our DDA deposits stand at 26% of total deposits. If you remember, just two and a half years ago when we started pushing DDA, we were in the mid-teens. So it's a big change in our deposit portfolio for the better over the last two, two and a half years. Our cluster funds came down to 57 basis points at the 23 basis point drop. And, you know, of course, the changing mix helps, but we also, you know, the running off of the CD book, and also we took down a lot of money market and savings rates, which helped to reduce our cost of funds by 23 basis points. Now, that's 57 basis points for the quarter. We actually ended the quarter even lower, because that's the average at a point in time, let's say, I think the number was 49 basis points. Wave if you think I'm wrong. No, 49 basis points. So we did hit a four handle literally in the last day or the last two days of the quarter. So we're starting the fourth quarter already at 49 basis points. And based on what I can see so far, the first three, three and a half weeks of the quarter, we are the trends that you're seeing in third quarter continues. So you should expect growth. You should expect deviate growth. and you should expect a continual drop in cost-to-cost. Maybe not 23 basis points, but it will still be a pretty solid number. Let's talk a little bit about the loan portfolio and the kind of the balance sheet. The last quarter, we had reported 3.6 billion, or 50% of the loans had been granted the initial three-month deferral. So updated through October 25th, that's the last day that we could pick before we went pencil down. For commercial loans and September 30th for residential loans, residential data is a little bit older, 983 million or 4% of our loan portfolio was either on a 90-day deferral or had been modified or was in some process of being modified. So those three buckets add up to $983 million. Now, as you all know, a significant portion of our residential portfolio, even though they are technically have a deferral, they're actually still paying as usual. So if I back those loans out, then that 983 drops to 788, or 3.3% of loans that fall into one of these three buckets. So that compares, once again, to 15% who were granted the initial 90-day deferral. Quickly, going to the P&L, and again, like I said, we will dig deeper into this. NIM declined by seven basis points from 239 to 232, largely because the investment portfolio came down and all our excess liquidity was deployed in the investment portfolio rather than in the loan portfolio. The investment portfolio grew by $607 million and loans declined by $69 million. Loan demand is fairly weak. With the exception of anything to do with residential, there, of course, we saw growth for the warehouse business and the residential business as well. Provision was $29.2 million this quarter. That compares to 25.4 last quarter, so basically in line. Reserves were now at 115, 1.15%. They were at 112 basis points last quarter, so again, you know, pretty steady. Book value has increased to $31.01, which is basically very close to where we were before COVID started. So, December 31st, we were at $31.33. So, we're pretty close back to it. Part of what helped here was obviously we saw continued improvement in the OCI. If you remember, we had a pretty big mark on the investment portfolio in March. We had a negative $250 million round numbers mark. That had improved to just negative $2.5 million last quarter, and now we're up positive $62 million. So all of that helps picking up book value and tangible book value. Capital, set one capital was 12.1% at Holco, 13.5% at the bank. We, of course, are here to pay our 23-cent dividend. If you recall, we had to increase the dividend in February. And even before we get a question on share repurchase, we are not yet buying back stock. We still think we need more optimism and more stability out there before we turn to share repurchases as an option. I think that will be a discussion point at the board meeting in November and probably again in February, but I would think that will probably be at least until first quarter before we move on this, given what we're seeing over the next few weeks. There's still a lot of moving parts to the economy. NTAs. Let's quickly get into some credit ratios. The NTA ratio was down just a little bit from two 58 basis points compared to 60 last quarter. If you carve out the guaranteed portion of SBA loans, it was 46 basis points compared to 47 last quarter. NPLs, again, were at 84 basis points. But again, if you exclude the guaranteed portion of SBA loans, they were at 66 basis points. So, year-to-date net charge-offs are running at 25 basis points. We took $24 million in charge-offs this quarter. 22 of that 24 was one credit that we had been talking to you about for some time. This credit had gotten to work out around this time last year. We have been collecting nicely every month. We were bringing this balance down. But as COVID hit, payments stopped. And to be honest, what started as a credit loss is beginning to look more and more like a fraud loss. So we're pursuing the guarantors and we're in litigation. But we've taken a fairly big charge off and we're fully reserved for this loan. Risk rating migration, we'll continue to see risk rating migration this quarter. particularly in the substandard accruing category. We take pride in basically the fact that when you see risk, we call it out. We don't try and kick the can down the road. So that's the directions we've given our risk people. If you think there are signs of stress, whether it's in cash flow or revenue or liquidity or leverage or anything, you call it the way you see it. So that's, you know, you will see that in the numbers. Quickly, in terms of just operational matters, we are still pretty much remote. We did start very collectively opening up a couple of our offices in Long Island and Westchester. We did allow about 20% of people to return, more as testing the waters than anything else. It is voluntary, and people, you know, employees who want to come back can come back, and of course we're taking all kinds of precautions to make sure everyone is safe. But a large part of our employee base is in Miami Lakes, and we haven't done that, and it will probably be at least a month or two before we do anything in Miami Lakes. There's no reason to be heroic in terms of bringing everyone back, so that's my stand on that front. Not much of an update on 2.0. The low-hanging fruit on the expense side, as you know, has already been harvested, and we'll continue to go after more expense where we can. On the revenue side, we did launch the commercial card program. It was delayed by just a few weeks. It was launched in August. I'm surprised, given, you know, everything that's happening, we were able to hold that timeline. And also on credit management and payment side, we're increasing that suite of products. So all is well on 2.0. And in an environment like this, the priorities that I have asked the team to focus on, one, obviously, is credit. We have to manage our credit book. And two... is in the long term, you know, we have to keep building our DDA book. We want to be an operating bank, not just a place where people park money. And you're seeing that. This is not just accidental that that level of growth is coming in. Of course, the environment is helping, but there is a lot of investments that have been made over the last year or two, a lot of effort that was put in that is paying off. And, you know, that $900 million of BDA growth, this is the quarter in which we're supposed to have life growth because PPP money was running off. And some of it did run off, and some of it will run off, you know, in the future. But despite that, to see nearly a billion dollars of BDA growth in an environment where we're all, you know, hiding under our beds and not really going out and, you know, socializing with clients, that's a pretty impressive number. So... With that, let me turn it over to Tom, who will talk to you a little more about the balance sheet, and then Leslie will take over from there.

Great. Thanks, Raj. Well, I'll start off with the deposit side. We certainly weren't hiding under our bed on the deposit side, as you can see. You know, we're very proud of the fact that we had NIDDA growth, as Raj mentioned, of $906 million for the quarter. And even beyond that number, you know, it was encouraging to see, as the same trends we saw last quarter and the quarter before, that growth is really, you know, very broad across all of the operating teams in the bank. All of the business lines are developing significant new operating treasury management business, and this certainly led to, you know, a strong quarter of the 906 for this quarter. We continue to allow higher cost deposits to run off for the quarter as time deposits declined by $843 million, and that left us with a total deposit increase of $527 million. Raj mentioned the PPP deposits. While it's difficult to be precise about this, we estimate that about $300 million of our current base of non-interest EDA on the balance sheet at quarter end is related to BU PPP loans, where we still see the proceeds in the borrower's checking accounts at this time. So a good portion of it has been used, but we still think we have about $300 million left. As Raj mentioned, the cost of total deposits declined to 57 basis points this quarter. On spot rate, the APY on total deposits was 49 basis points as of September 30th, down from 65 as of June 30th, and 142 basis points at December 31st, 2019. The spot rate on interest-bearing deposits was 65 basis points on September 30th. Reduction in the cost of deposits this quarter was also broad-based across all product types, all lines of business, and we have a very significant effort and methodical effort going forward to continue those trends. As of September the 30th, 2020, 1.5 billion of the CDs at an average rate of 1.67 has not yet repriced since the last FedCon in March, so we'll see the majority of those repriced over the next couple of quarters. And additionally, some of the CDs that matured and repriced early in this current cycle that we're in will probably reprice again at their next maturity date, so we should see some added benefit from that as well. You know, as we look across the sales opportunities in the bank and the pipelines, you know, I think we continue to see healthy pipelines and opportunities for poor deposit growth across all of our business lines. It's somewhat more difficult to size deposit pipelines than loan pipelines. Normally, when you fund a loan, you fund the balance at the inception. Usually, deposits take a little bit longer to develop. But we do expect non-interest EDA to continue to grow in this quarter and for some time. For the year, we would expect total deposit growth to be in the low double-digit number. So let me switch to the loan portfolio. In aggregate, total loans declined by $56 million in the third quarter. That's a little bit of a disparate story across different areas of the bank. We saw continued growth in the mortgage warehouse business. Outstanding balances grew by $90 million for the quarter, while commitments grew by $357 million. They actually grew the commitment base to an all-time record for us in that business line as of 9-13. The residential portfolio grew by $363 million in the third quarter. $264 million of that was in the Jenny Mae early buyout segment. Switching over to the more standard commercial areas of the bank, C&I loans declined by $254 million as new originations were not sufficient to offset pre-payments and lower line utilization. Right now, we're seeing line utilization from our corporate clients at kind of a historic low for the bank, which actually we think is, in this current environment, is probably a good thing from a credit quality perspective. CRE declined by $97 million for the quarter as the New York multifamily portfolio continued its downward runoff as we got over the last, you know, 12 to 14 quarters or so, although at a somewhat slower pace. Balances and Pinnacle, BFG Franchise and Equipment, We're also down for the quarter by $161 million. You know, as we look forward, we currently expect these trends to continue. We think total loans are likely to decline in Q4, leading to an overall growth rate for the year in the low single digits. Last couple of calls, we spent some time just talking about strategy on the credit side. Strategy really has not changed significantly in the last couple of quarters. We'll continue to be highly selective about new originations until we're more comfortable with the long-term trajectory of the economy and the impacts of the healthcare crisis. We're taking the position of increasing facilities to existing clients. We're seeing some industry segments where there's certainly growth, and we're seeing some clients in what I would call more mission-critical industry segments where actually the M&A market is better. valuations at this point are more favorable for acquisitions that they've been in a period of time and we're continuing to fund into those opportunities as well. We're more cautious around totally new relationships as the opportunity to know those clients and visit with those clients and review their operations physically are more limited in this environment. So we are pursuing some new opportunities that we consider to be you know, very, very high quality balance sheet credit opportunities and especially those that are in the industry segments where we have, you know, the most capability and also those that offer us, I think, the best long-term deposit opportunities in the near future. On PPP, we recently opened up our portal and we're starting to take forgiveness applications from customers. We expect PPP forgiveness to be largely a Q121 event. 38% of our PPP loans by unit count are under the $50,000 level and eligible for the SBA expedited forgiveness process. I'd like to go into a little bit now more detail on some of the deferral information and refer you to slide 16 in the supplemental deck. We'll talk more about two different timeframes in this part once where we finish 930 And one, as Raj mentioned, is an update as of the 1025 number. So from a commercial loan perspective, 234 million of commercial loans were still subject to either the first or second 90-day deferral request as of September 30th. 246 million of commercial loans had been modified under the CARES Act, and another $220 million of commercial loans were in the process of modification. All of this totaled about $700 million or approximately 4% of the total commercial portfolio as of September the 30th. This number is relatively consistent with the $696 million that we reported on our commercial loans that we had received second deferral requests on our last call. So that's played out just about how we thought it would play out. As of October the 25th, improvements in this area, $152 million of the commercial loans on short-term deferral had resumed payments, loans on short-term deferrals declined to $74 million, and loans that had been modified or were in the process of being modified under the CARES Act totaled $493 million. In aggregate, this was down to $567 million from 4% to 3.2% of the total commercial portfolio at 1025. Not unexpectedly, The portfolio segment that has been most impacted has been our hotel portfolio within our Cree business line, where 47% of the segment was on deferral or had been modified as of September the 30th. Of note, 12% or 76% of the franchise portfolio was also on deferral as of September 30th compared to 74% that were granted the initial 90-day deferral and 25% for which a second deferral had been requested when we reported to you at the end of the second quarter. So the numbers have kind of come from 74 to 25 to 12 is sort of the trend line. Of the 76 million on short-term deferral at September the 30th, you know, a very positive note, 74 million of that 76 is now resumed payments in October. On to the residential book. residential excluding the Jenny Mae early buyout portfolio, 395 million of the loans are on short-term deferral. An additional 21 million has been modified under longer-term repayment plans as of September the 30th. This totaled 8% of the residential portfolio, down from 594 million, or 13% of the residential portfolio as of June 30th. Also note 49% or 195 million of the residential loans on deferral have continued to make payments during the deferral process or deferral period. Loans showed on the slide that I referred you to as modified or in the process of modification under the CARES Act are those for which the 90-day deferral period wasn't going to be quite enough to see them through this economic phase. I think particularly those in the more heavily impacted industry segments are going to be there, but which we believe the longer-term modification will equip them to help get them through this period of time. Most of the CARES Act modifications have taken the form of 9- to 12-month interest-only periods for those loans. I wanted to switch a little bit to talk about the real estate portfolio in a little bit more depth as it relates to rent collections during the third quarter. So I'm going to give you some data that's samples of some of our larger loans within each of the asset classes within the CRE segment. And these represent the average of the three months of the third quarter. So if we look at different asset classes in the office segment, we're seeing rent collections for our loans that we sampled in the 90% range. Both Florida and New York are staying about consistent with that number. Multifamily is also performing well, averaging in the low 90%, also well in both markets. Retail, as we talked about earlier, is probably the segment where we're seeing the most diversity among rent collections. Better high-quality properties in some of our larger loans are still seeing rent collections in the 90s, but that's a fairly broad category. We're seeing rent collections that are running anywhere from You know, 40% to 45% up into the mid-'90s, depending upon property location, the type of asset it is, tenant base, and so forth. Within the industrial segment, you know, that continues to be a very high-performing segment, and essentially rent collection in industrial is near 100%. Switching a little bit more to hotels right now, all of our hotel properties in Florida are now open, which is a big positive. And two of the three properties are now open in New York. In the Florida market for the third quarter, we're seeing occupancy generally in the 40% plus range, as high as 45% for September. Some weekend spots higher. You know, some property that's predominantly leisure and beach, even higher than that. New York is still suffering. Obviously, business travel is down. significantly in the New York market. As I said, two of the three are open. Occupancy is low, but at least it's starting to rise. Switching to the franchise segment for a moment. In restaurants, the QSR casual dining space, we're seeing kind of mixed trends depending upon service model. Stores with well-defined delivery, pickup, or drive-through models. In most cases, we're seeing double-digit year-over-year increases at this point that's particularly prevalent in some of the stronger pizza and chicken concepts, while concepts, you know, below that are generally in the flat sort of range, maybe just slightly down. And in-store dining casual remains probably the most challenged within that segment, seeing same-store sales declines still on a national basis that are a bit heavier than what I noted. You know, on the fitness, We saw improvement in the third quarter in terms of the number of stores that are now open. Eighty-four percent of our finance stores are now open for business. Really only New York, New Jersey, and California stores remain predominantly closed at this time. So that's 84 percent of our stores. And on sort of a dollar average basis of exposure, it would be about 70 percent of the overall exposure that we have. So, you know, and what we see in that market is memberships are coming back, utilization is coming back, and stores that were open six, seven, eight weeks ago are now reporting more favorable results, and stores that are opening up in the last couple of weeks are starting to see, you know, some climb as well. So we see improving trends overall in the fitness area as well. So that kind of covers the loan portfolio, and we'll turn it over to Leslie now to get more detail on CECL and quarterly results.

Thanks, Tom. So I know you guys are all just itching to dive into another conversation about CECL, so that's where I'll start. Overall, the allowance for credit losses increased from 1.12% of loans to 1.15% of loans this quarter, and I'll refer you to slides 9 through 11 of our supplemental deck that give you some details on our economic forecast and on changes in the reserve and the composition of the reserves. A few offsetting factors impacted the reserve this quarter. We saw a $10.6 million increase related to the economic forecast. Even though generally we've seen improvement in economic conditions, our economic forecast committee selected a forecast scenario this quarter that was just slightly less optimistic than the scenario that we selected in Q2, which led to that. Charge-offs of $23.8 million reduced the reserves. and the net impact of risk rating migration and increases in specific reserves offset that and increased the reserve by $27.3 million. We had an $8.1 million reduction in the amount of our qualitative overlays, which at least in part is offsetting that increase due to risk rating migration as some of those qualitative factors are being captured in the quantitative reserve estimate. However, we did think it was prudent to hold on to A large portion of the qualitative overlay that we put in place last quarter due to the level of uncertainty that's still out there around the virus, the election, et cetera, we weren't really comfortable with reducing all of those qualitative overlays this quarter. Some of the key economic forecast assumptions. I'll remind you, however, that the models do ingest hundreds if not thousands of national, regional, and MSA-level economic data points. So the ones I'm going to give you provide really only a high-level insight into the nature of the forecast. But the forecast scenario we chose shows national unemployment increasing to just over 9% by the end of 2020, then trending down and averaging 8.4% through 2021 and continuing to go lower from there. Real GDP declining 4.3% in the aggregate for 2020 and increasing 3.5% in the aggregate for 2021. The S&P 500 index remaining relatively flat, close to 3,000 through 2021 and then trending upward, with volatility trending down slightly to under 20 through the end of 2021, and a Fed funds rate that basically stays at zero at least into 2023. The franchise finance portfolio continues to carry the highest reserve level at 4%, followed by CRE at 1.6% and CNI at 1.3%. The reserve on the residential portfolio did increase this quarter from 19 to 27 basis points. This was related primarily to changes in the economic forecast, particularly the unemployment outlook, to which that model is extremely sensitive, and some changes in modeling assumptions about loans on forbearance. Slides 23 through 26 in the deck provide some details about risk rating migration for the quarter. As I think we would expect in this kind of a volatile and evolving environment, as more information becomes available about the impact of the pandemic on specific businesses, our total criticized and classified assets did increase this quarter. There was a net decline in special mention loans of $386 million, while substandard loans, mostly in the substandard accruing category, increased by $816 million. The majority of those downgrades were actually migration from special mention to substandard. Not unexpectedly, we saw the largest increase in the CREE retail and hotel segments in terms of criticized and classified assets. The total increase in CREE and criticized and classified was $276 million, which was a $168 million decline in special mention and a $445 million increase in substandard. And again, most of this related to the hotel and retail property types. You can see what went on in the rest of the portfolios on the charts on the slide. and I won't go into those details right now. Non-performing loans remained relatively flat quarter over quarter, totaling $200 million at September 30th. As expected, and as Raj mentioned earlier, we saw continued recovery in the fair value mark on the investment portfolio this quarter. If you recall, at the end of the first quarter, the portfolio was in a net unrealized loss position of about $250 million. That improved to a net unrealized loss of $3 million at June 30th, And at September, the portfolio was actually in a net unrealized gain position of $62 million. The NIM did decline this quarter to 232 from 239. Last quarter, we had guided to flat. The main factor that influenced that decline was the deployment of liquidity into the bond portfolio, which while accretive to net interest income on the whole, it certainly was not accretive to the NIM. But in a period of, you know, challenging credit environment and muted loan demand, we saw that liquidity deployed into securities, which had a negative impact on the NEM. The yield on interest-earning assets declined by 22 basis points. There was a 10-basis point decline in the yield on loans and a 48-basis point decline in the yield on investment securities. We had resets of coupon rates on floaters. Amortization and prepayment of higher yielding mortgage-backed securities and purchase of new securities at lower prevailing rates that all contributed to that decline. The average rate on debt securities that we purchased this quarter was about 150, ranging from a low of under 1% for some agency floaters to a little under 2% for some of the private label securities that we bought. Rates on our commercial loan originations this quarter were in the 330 to 350 range. Total cost of deposits declined by 23 basis points quarter over quarter, with the cost of interest-bearing deposits declining by 26 basis points. Of note, the cost of our FHLB and PPPLF borrowings increased by 24 basis points this quarter. The driver of that is simply that the advances that were paid off this quarter were the shorter-term, lower-rate advances. A significant portion of the advances remaining on the balance sheet are hedged and are at a little bit higher rates. Most of these hedges run off over the course of 2021. The sub-debt raise that we did in June also impacted the NIM for the full quarter in the third quarter. Just a few high-level comments about non-interest income and non-interest expense that impacted CP&R this quarter. Gain on sale of loans was down as we didn't really have a lot of SBA loan sales. Our whole SBA machine has been focused on PPP loans for the last couple quarters. Lease financing income, as we had guided you previously, has trended downward and will probably continue to do so in the near term as assets coming off lease are being released at lower rates. Increase in deposit insurance expense is related directly to the increase in interest classified assets, which impacted our assessment rate. I want to just mention that we continue to have a robust liquidity situation. We haven't experienced any liquidity stress since the onset of the pandemic, and I think that's true across the industry. Now I'll shift for a minute to our expectations for the fourth quarter. On the NIM, we expect the NIM to be flat to possibly up a couple of basis points as the cost of deposits will continue to trend down. The yield on earning assets will also continue to trend down, but we do expect, as of right now, the NIM to hold at this level, even with some expected continued growth in the bond portfolio. From a balance sheet perspective, as Tom said, we expect a net runoff in loans in the fourth quarter, likely some growth in the residential portfolio, and we expect loan growth for the year to come in at low single digits. Deposit growth is a little harder to predict with precision, but we do expect growth in both total deposits and non-interest DDA in Q4, with some continued runoff of the time deposit portfolio, leading to overall low double-digit deposit growth for the year. And again, we are likely to continue to see some securities growth in Q4 as liquidity is deployed into the bond portfolio. Expenses, our expectation for the fourth quarter is relatively flat to the third quarter. but we may have an adjustment to variable compensation expense in the fourth quarter, just depending on how full-year results come in. The provision, I know you guys want me to give you a number, and I wish I could. It will depend to a large extent on the economic forecast we're looking at in December. Beyond that, in the absence of any deterioration in the economic forecast, any provisioning in Q4 would relate primarily to any further risk rating migration or changes in specific reserves, which could go either way. It's just too early to predict. But right now, I'm not expecting any across-the-board reserve bills going forward. The tax rate is expected to come down a little bit for Q4 to between 20% and 21%. With that, I will turn it over to Raj to make any closing remarks.

Guys, thank you for bearing with us. We take a long time, given there's so much information we want to put out to you. We'll open it up for questions, and you don't delve into anything you want to get into. Operator, you may take questions.

Thank you, sir. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Jared Shaw from Wealth Fargo Securities. Please go ahead.

Hi. Good morning. Hey, Jared. Good morning. Maybe just sticking with credit or starting with credit, you know, Leslie, you heard your comments on provision for fourth quarter, but, you know, as we look at the loans that you've proactively already risk-rated down that are still on deferral, as those as those come off of deferral or as you see more of a permanent restructuring happen, do you still think that the allowance captures that impact? Is that what you're talking about in terms of, you know, potential additional risk rating migration? Or is it really you've already internally risk rated those, the allowance captures that, and as we see, you know, any charge-off or any type of restructuring, that there shouldn't be a big impact to the provision?

You know, Jared, it's hard to dimension that because it's kind of a loan-by-loan thing. But certainly, I think it's likely in the fourth quarter that – or I won't even say likely. I think it's possible in the fourth quarter that there could be some additional risk rating migration that could lead to some provisioning in the fourth quarter. But again, I wouldn't expect, you know, broad-based reserve building. This is a very fluid environment, and we get new information every day. about what's happening and what's going on with borrowers' businesses and how they're being impacted by current events and the current situation. So it's a pretty fluid situation.

Okay. Thanks for that, Kelly. And then just shifting to the deposit side, one, I guess, you know, when you look at the growth that you've been seeing, how much of that is coming from that national deposit group versus, you know, sort of blocking and tackling within the footprint? And then as we look forward, looking at the interest-bearing deposits, how low do you think we can get in terms of what you're actually paying on time and money market and interest savings or interest checking?

So it's very hard for me to say how low can we go. Clearly, there is room to run the fact that we are already in the 40s, And as I've said in the past, I'll reaffirm the fact that our deposit cost should decline into the middle of next year. So there's a lot of runway for us to take this down. Now, not 23 basis point or quarter, but something lower than that. To your first question, I would say the growth in DDA and in total deposits was pretty widespread. New York, Florida, Nationals, everything contributed. So it wasn't any one place where I can say, well, that's where it came in. And that's been the case for some time now because we focus so much on this across the board that it's coming in from every direction. The only thing that is shrinking, really, is the retail CD portfolio, which we're doing deliberately.

Okay, thanks. And just finally for me, any more specific update on what you're seeing in the New York City multifamily and retail side? you know, it seems like that's still being hit harder than the broader national platforms. What your thoughts are there in terms of timing for ultimate resolution or strength there?

Tom, you want to talk about that? Yeah.

Yeah, I would say first, you know, that there's actually three asset classes when you look at that. There's multifamily only, retail only, and multifamily that's mixed with retail in it. You know, if you look at our multifamily portfolio, Today in New York, it's about $1.2 billion, a little over $1.2 billion. We expect to see that continue to decline with fourth quarter maturities, but the overall performance in that portfolio I think is good. Our portfolio is predominantly in regulated type units. We have a relatively modest exposure to free market and free market is particularly the upper end is where you're seeing, you know, higher-level vacancy numbers. So when you look at national headlines about vacancy in the New York multifamily market, they tend to throw out one number, and that number is not, you know, indicative of all segments and all, you know, geographies within the New York market. So, you know, we see that portfolio. continuing to decline a little bit, probably down another $70 million or so, I'm guessing, depending upon what maturities look like in Q4. The retail component is a little tougher. We are seeing some improving trends in rent collection, but I think retail in New York is certainly going to be a challenging place to be for a while until that economy starts to to move out of it. We have little exposure in what I would call high street retail, which I think is the most difficult part of the retail market. So, you know, Madison Avenue, Park Avenue type property is not really our retail exposure. It tends to be smaller retail that's also attached to some of our multifamily exposure. And that's And interesting, while those are not per se credit tenants, those are the tenants that are actually working with the asset owners to make payments. We tend to see in the larger segment where you have national retailers, those tend to be the ones that are really aggressively pushing nonpayment. Right now, our smaller local tenants are coming up with payment plans and paying two or three times a month and whatnot, but collections So, you know, that's kind of how I would summarize, you know, New York multifamily and retail right now.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Stephen Alexopoulos from J.P. Morgan. Please go ahead.

Hey, good morning, everyone.

Good morning, Stephen.

So I wanted to follow up on the deposits also. You guys have had really good success in transforming the deposit base. But if we look at the strong deposit growth, it's coming at a time where just about every bank has good strong deposit growth, right, as customers just sit on more liquidity. Is there any way to tease out from the growth numbers what's market share gain, success of BKU 2.0 versus just clients sitting on more liquidity?

Yes. I don't know how you do that. Maybe a number of accounts or something like that.

Yeah, so we track new account, new client, new logo is kind of our internal vernacular for that. So one of the things that we see is our new logo generation across all of our business lines is very strong. So while we do see, you know, certainly some larger corporate accounts that are sitting on higher degrees of liquidity than they might have before. When we track new logo, you know, new logo success across all of our lines of business, it is historically, you know, much stronger now than it has ever been before. And that's broad-based in every line of business.

The other thing we do, Stephen, is we do quite a bit of analysis, transactional analysis around activity in those accounts to try to have a better understanding of what might be excess funds versus operational funds. But those numbers aren't quite ready for prime time. I'm not at a place where I can make that public. But I also think that, you know, largely you're right. There is a lot of liquidity in the system right now. if companies start investing or spending that money, it's going to stay in the system. So we're going to be on the losing end of some of that and on the receiving end of some of that. I think the only thing that is really going to pull that liquidity out of the system is the Fed, and they haven't made any noise at this point that they're thinking about doing that.

Another way, Steve, to think about this is we look at the payments that are flowing through the bank, and they are up very, very strong, not just this year, but they've been on a very strong growth clip for about three years. So if it was just, you know, the same old guys just sparking money because they are, you know, everyone has a lot of liquidity. The operational metrics, when they start to, you know, they're growing very, very strongly. We don't publish them because there's no sort of set way of putting these things out, but we look at them internally because they actually, believe it or not, there's... There's a flip side to it, which is cost. When you have a lot of payments going through, you need more operational support. So we're budgeting right now, and it's a good problem to have if you want a lot of people to use the bank for their wires and ACH and everything else. It also means that we have to keep investing in the operational support needed for that ADA business.

That's helpful. Thank you. Roger, as we think about 2021, it seems like the industry is going to struggle with pre-tax, pre-provision growth. I know you said as it relates to BKU 2.0, the low-hanging fruit on the expense side has already been plucked. I'm not looking for guidance, but from a high level, do you think there's enough still to do on the expense side where you guys could see at least some pre-tax, pre-provision growth next year?

Yeah. There is. It's harder to quantify and harder to sort of commit to in timelines. So, for example, as part of 2.0, one of the things was automation. And we looked at the stuff that we had to automate. There were 15 different functions, and we went ahead and automated that. But it should stop there. That should be part of our culture. We should constantly be looking at processes and say, okay, where can I automate more? Where can we deploy more RPAs? And it shouldn't just be a project, right? Going forward, it should be just part of the discipline. And there's a lot of stuff that is still manual in the company. We did the easy ones, and now we're getting on to the harder ones. And we'll keep doing it, and that should be just part of the budget. You take those dollars, and you probably reinvest in sales or in other parts of the company to invest for the long term. On the branch side, we do want to take a look at the branch footprint again. but I wanted to wait at least until the new normal emerges. Right now, we're not in a normal environment. Right now, we're in a weird environment. We don't know what usage will be and what client expectations will be. I'm hoping that we get there by first quarter, or whenever we get there, we take a hard look and say, okay, now in the new world, this is how many clients are going to come in or not come in, and we can decide are there another six or 12 branches that we can consolidate.

The other thing I would say... Even about the U2.0 that I think we'll start to see materialize more in 2021 is some of the revenue pieces. We did launch our commercial card program in August as planned, and we haven't really seen any appreciable amount of revenue from it yet. Some of the things we're doing on the fee side will hopefully also contribute to PPNR going into next year.

Okay. So it sounds like you're sounding fairly optimistic. I mean, who knows what growth will actually be, but that you're in a good position to have some incremental revenue initiatives kick in. There's more to do on the expense side. Is that at least fair?

Yeah, I would say so. You know, as much as you can see in this environment, yeah, I would say that would be fair.

Okay. Great. Thanks for taking my questions.

Yeah. Thank you. Our next question comes from the line of Stephen Skelton from Piper Sandler. Please go ahead.

He might be on mute. I'm sorry, can you hear me? It's open.

Yes, go ahead. Okay. Sorry about that, guys.

Can you hear me now?

Yeah. Okay. Sorry. So thinking about slide 10, again, Leslie, you went through on the migrations of the loan loss reserve. I know it lists here 27.3 million that was due to some of the portfolio risk rating migrations in the specific reserve. I just wanted to maybe tease that out a little bit and understand how much of that was the movement in the accruing substandard that you guys noted, or how much of that might have been related to the one larger charge-off?

The charge-off reduced the reserve. That had already been provisioned and really didn't have much impact. We did do some additional provisioning around the remaining balance of that loan this quarter, so that's part of the $27.3 million we did provide. We have now fully reserved for the portion of that loan we haven't charged off, so that was part of it in combination with... the move to substandard accruing.

Okay, great. And then on your NIM guidance, does that include any expectations around PPP fee realization? And can you give us some numbers on what you guys have left to realize or maybe what you realized this quarter?

Nothing realized this quarter. We haven't I mean, other than just amortization, but we have not realized any fees upon forgiveness this quarter, and we aren't building any into next quarter. I think this is really a Q1 2021 event. So our NIM guidance assumes there will be no PPP forgiveness in the fourth quarter. There may be a little bit before we get to the end of the quarter, but we're assuming that will be zero for the fourth quarter.

Okay. And then maybe just last thing for me, and it –

Somebody's looking that up. Go ahead.

Okay, great. And then just last thing on the hotel book, you know that I think two of the three properties in New York City or New York are back open. I'm just wondering if you have any data available on those properties, New York properties in particular, around LTVs, occupancy rates, anything like that that might give some additional color.

I don't have that in front of me right now specifically, but I do know that the occupancy rates are pretty low.

which uses two of them instead of having, you know, business travel coming to them. They're using them for, you know, workers and, you know, health care workers and things like that because they're a broader use hotel concept.

Got it. Got it. And you guys noted that some of the migrations were kind of in hotel and retail, so would it be fair to assume that those are probably encapsulated in some of that increase in the substandard accruing?

Absolutely.

Perfect. Great, guys. Thanks for the call. I appreciate it.

Thank you. Our next question comes from the line of Brady Galey from KDW. Please go ahead.

Hey, thanks. Good morning, guys. Good morning. Good morning. So if you look at the growth in the bond portfolio, you know, bonds are now about 27% of average earning assets. Do you expect that ratio to continue to go higher? Do you expect it to continue to increase to the bond book from here?

I think in the fourth quarter, we'll probably see some additional growth in the bond portfolio because I think we're still going to be in this situation where we have liquidity that we're unable to deploy into the loan portfolio. I'm not really comfortable yet predicting beyond one quarter in advance with respect to what the world is going to look like. But the duration of the bond portfolio is very low. It turns over cash flows pretty quickly. So I wouldn't view that as a permanent situation. I would view that as a temporary situation. Ultimately, that will be redeployed back into the loan portfolio.

And then you mentioned the $1.5 billion of CDs at, I think, around 170 basis points that will be rolling over. But what's the new CD rate that you're offering? How much savings do you think you'll be able to get there?

We're currently offering right around 50 basis points.

Okay. And then finally for me, just any additional color on the CNI relationship that got, I think it was about a $20 million charge-off this quarter?

It's in litigation, and I think it will be a while before it gets resolved. But like Leslie said, we fully reserve for it. We'll take a pretty aggressive charge-off, but it will be a long, drawn-out litigation.

What type of CNI loan was it for us?

It was a wholesaler, a distributor. We've had a relationship for a very long time, but it started souring last year, and we were working with a client, and we were collecting, you know, a million bucks a month, and it was coming in nicely. But under the fire of COVID, I think it turned from a credit loss to something worse.

Got it. Great. Thanks for the call, guys.

I just want to circle back real quick to the question that I said somebody was looking up. I have an answer on how much, you know, deferred fees are left on the PPP loans. It's about $17 million in the aggregate.

Thank you. Our next question comes from the line of Ken Zerb from Morgan Stanley. Please go ahead.

Thanks. Leslie, in terms of your reserves, how would no additional federal stimulus affect your reserve balances? Is that priced in?

So it would run through in the form of changes in the economic forecast that we're using. There is some, as I understand it. You know, we use primarily Moody's forecast, and they had factored in some assumption of some additional stimulus. So to the extent what they had already factored in was off either to the negative or the positive, it would impact it. If we end up with more stimulus than they're assuming, obviously it will have a positive impact on the economic forecast. And if nothing gets done, which I don't think is likely, but that's just my opinion, if nothing gets done, you know, it will have a negative impact. But it will come in through the economic forecast, Ken.

Got it. Okay. So it sounds like something's in there and we need to get it out, so it might be a bit of a negative. Okay. And then a similar question, if this third wave of COVID cases we're experiencing continues to get worse, do you feel that Moody's is accurately accounting for that in their forecast?

I mean, it's my opinion that they're doing a pretty good job. They've got some pretty robust assumptions built into their forecast around the progression of the virus and expected case counts and expected impact, but just like the rest of us, they're estimating. I don't want to use the word guessing because I think they're hopefully smarter than I am, but when it comes to that sort of thing, but they certainly are modeling it and building it in. Obviously, there's uncertainty around that, so their estimates and their expectations around that could be off in either direction, but they certainly are making a very concerted effort to encompass those factors in their forecast.

Got it. Okay. And then just a really quick one. The Ginnie Mae early buyout loans that you guys talked about, is that just the resi mortgages that you're buying, or is there something unique about those?

There are residential loans that we buy out of – defaulted residential loans that we buy out of Ginnie Mae securitizations is what they are, Ken.

Got it. Okay, great. Thank you very much.

Thank you. I'm sure our next question comes from Brody Preston from Steven Zink. Please go ahead. Good morning, everyone.

Good morning.

Hey, I just wanted to ask real quick, you mentioned the hedges. I just wanted to better understand, do you have a, excuse me, like a sort of a timeline as to when those hedges run off and then the underlying borrowings, will those stick around or do those run off as well?

So the hedges run off, the vast majority of the hedges run off over the course of 2021. relatively evenly over the year, and I think there's close to $3 billion of notional of those on the balance sheet right now. As to whether the borrowings stick around or not, certainly they'll reprice down if they do. As to whether they do or not, it'll depend on what our liquidity position is at that time and what our needs are.

Okay. And those are floating rates tied to LIBOR, correct? Correct.

That's correct, but they're hedged. So effectively, we've converted them synthetically into fixed rate borrowings, which is why the rate on them isn't coming down.

Right, right. I was just thinking about when they do reprice.

Yeah, over the course of 2021. And they should come down materially. And like I said, whether they stick around will depend on our liquidity position and whether we have a need for them.

Okay, great. And then it's good to see the fitness deferrals down significantly. Just wanted to get a sense for what discussions would these franchisees have focused on. Are they still seeing continued cancellations or are things steadied out? And then just the orange theory deferrals sticking around, is that just timing or is there something specific about that business model that makes it more difficult to operate in the current environment?

You know, it's – That's a hard one to make a blanket statement on. You know, we have, you know, 180-some-odd, you know, stores within that one concept, and in the diet and fitness area, which is where our other exposure is, we have a similar number. So they're all at different phases depending upon when a state opened up and depending upon where those are. These are, you know, all relatively, for the most part, smaller businesses. I would say we, you know, we had some conversations with a number of franchisees this week as well as franchisors in the space. And, you know, in general, I would say, you know, we're seeing attendance, you know, moving up in some places stronger, in some places more gradual. You know, in membership. We're now starting to see, you know, generally upward trends in membership coming back. Not 100% in every store, but if you step back and look at all, you know, 300 or so stores that we have in general, I would say the membership and utilization trends are starting to improve over the last couple of months and the overall portfolio is in a better position particularly in the last 90 days than it may have been in the previous 90 days, and now we're down to only really a couple of states that have not opened up the source. Okay.

All right. Thank you for that. And then I know it's a smaller portion of the CRE book, but just wanted to know what you all are sort of seeing in the New York City mixed-use portfolio. Has that improved at all in the last few months, or – Is it still a tough operating environment?

Yeah, what you see in those loans is, you know, these are typically smaller walk-up apartment overshore site units. You generally see the performance in the apartment percentage of it is fine, particularly if it's a rent-regulated unit, which most of them are. You know, these smaller units tend to have three or four stores, five stores maybe, max on the ground floor. You're seeing vacancy in some of those store units. I think that you're going to be looking at longer-term vacancies in some of them. You know, there's certainly efforts to release property, but right now, you know, new tenants are about to come by in these smaller New York retail units. loans. So the residential, if you will, part of those loans is performing well, but the relationship that the retail has to the overall cash flow stream, you know, is larger than it might be if it were a, you know, a 15-story multifamily, you know, project with 150 units versus 20 or 25 units. So, you know, there are I think it's going to be until the New York market starts to recover a little bit more on a retail perspective until some of those turn around.

And I guess on average, what percentage of the rent roll is made up by the, I guess, the retail portion of the mixed use?

Yeah, I don't think we have that right here.

It would obviously vary from property to property. Yeah.

There is some information in the slide deck. It's not percentage of the rent roll, but it does at least give you the total dollar amount of loans that are those mixed-use properties. But I don't have the rent roll information.

This is more of an impression from talking to the property owners, I would say. Obviously, it has to be more than 51%. is based on the residential component versus the multi-family portfolio. I would say in most of the smaller properties, you're probably looking at a 65-35 blend, maybe 70-30. But, you know, the historic debt service coverage ratios for property in these segments because of the cap rates and values in New York have, you know, normally been in the you know, 1.20 to 1.30 range. So, you know, a loss of a couple of tenants, you know, is impactful, you know, to the overall cash flow of the property. There's the amount in the total mixed use portfolio of $284 million. Yeah.

Yeah, I saw that in the deck. Thank you for that. And then last one for me real quick, Leslie. I know you talked sort of ad nauseum about the But just wanted to think about the mix between the qualitative overlays and then the specific migration. I guess just when I think about the CISO model and the economic forecast, I guess I just would have thought that some level of migration would have been built into it. And so I guess how should we view the $27 million you reserve for the migration? Is it? Is it more than what the model would have baked in already, or should I be thinking about it more in terms of a mix between we're actually seeing some quantitative migration, so that will increase, and then the qualitative factors will come down?

I think it's mostly the latter. We'll see the qualitative factors come down and the quantitative portion increase. The model does have some of that baked in, but the model only knows what we can tell it, and we're in a very fluid environment and where the model is taking something and saying, okay, if this happens to the economy, we predict this will happen to these borrowers. There's just facts that the model doesn't know about individual borrowers, and we feed those facts to the models as they become known to us. So we try to capture that qualitatively until we can get it into the models. So you will see qualitative come down and the quantitative, you know, either disappear altogether because things get rosy, or we moved into the quantitative portion, but we did choose this quarter to hang on to some of those qualitative reserves rather than releasing more of them simply because we're still faced with what I think is a pretty volatile environment and a pretty high level of uncertainty, and we weren't quite comfortable pulling all that off.

Okay, great. Thank you very much for taking my time.

I also want to quickly correct a statement I made before about the roll-off of those hedges. Probably about $2 billion of those hedges are going to roll off in 2021, and then a little bit more of it will stick around beyond that. So I misspoke, and I just wanted to correct that statement.

Okay, great. Thank you for the clarification.

Yes.

Thank you. Our next question comes from the line of Christopher Marinak from Jenny Montgomery.

Please go ahead. Thanks. Good morning. Raj and Leslie, if I heard you correctly on the criticized and classified known numbers, it looks like the ratio to capital reserves is up from June to September. Should it peak here, and should we be more focused on the classified than the total criticized piece?

Okay. You know, I wish I knew the answer to that question with and could give you a definitive answer about what risk rating migration may or may not look like in the fourth quarter. I don't think it's outside the range of possibility that we will see additional migration, particularly into that substandard accruing bucket in the fourth quarter. We may not. Certainly if we knew about it, we did it already. But in this kind of an environment with some of the uncertainty and volatility that remains out there, I don't think I would be comfortable saying definitively that we're done there.

And even this quarter, you're seeing net numbers, but there were movements on both sides. You've had things actually improve and go back into the past category, but then you have net migration in the wrong direction. It is such a fluid environment to try and predict that when we do this exercise again in December, what will be the health, the liquidity, the revenue picture, the leverage picture of our clients. It's just very difficult to do that compared to when we did this exercise in September. So we generally do it late in the quarter to try and capture as much as we can of what has happened and try and get as recent a picture as possible. But it's difficult. And I fully expect some to get better and some to get worse. Where will the next number be? It is very hard to tell.

I appreciate the color, and again, the preserved build that you're doing really reflects the lost content, so perhaps that's the point at the end of the day.

Yep.

Great. Thanks for all the information this morning.

Thank you. Thank you. Our next question comes from the line of Stephen Duong from RBC Capital Markets. Please go ahead.

Hi. Good morning, guys. Good morning. On your CET1, it showed a good uptick this quarter, and I know it's early, but as things start to unfold next year and if losses end up being low or delayed, is there a capital level where buybacks become more attractive form of deployment for you guys?

I think buybacks are always an important tool to manage capital. It's just that you can't really use that tool in an environment like the one that we're in today. I'm hoping that's a different story three or four months down the road, but I don't think in the next couple of months things will change.

Got it. And then just following up on the borrowing, Leslie, as the hedges roll off at $2 billion next year, Is it fair to see the borrowings costs kind of tick down every quarter next year?

Yes. I don't have in front of me exactly how much of it rolls off each quarter, but, yes, that's fair. I can't say it will be even quarter over quarter, and, you know, we'll try when we put our guidance for 2021 out in January to maybe be a little more specific about where we expect that to land. But that is fair, yes.

All right, perfect. That's it for me. Thanks for the call.

Thank you. I'd say our next question comes from the line of Ibrahim Poonwala from Bank of America Securities. Please go ahead.

Good morning. And sorry if I missed this, Leslie, but I just wanted to follow up in terms of the margin outlook. X sort of the PPP, X some of the hedges. When we look at the margin today at 2.3%, big picture, do you think we're getting to a point of stability? And I guess tied to that, and maybe Raj, if you want to add to this, talk to us around what you think the bank can learn from a return on equity perspective as we look into 2021 and beyond, assuming there's no big change in the interest rate backdrop.

Yeah. So I think you did miss Leslie's comment. Again, trying to predict for too long is very dangerous business, but at least for the next quarter, we feel that margin should be pretty stable. It might even be up a basis point or two. So stability in the margin, given everything that we're doing on the deposit side, we can do that despite pressure on the asset side. So, you know, where that solves for today in a more normalized sort of environment would be a 9%, 10% return on equity margin. that's sort of the environment we're in with rates at zero and margin pressure being what it is. I mean, our margin has been in the mid twos. If it wasn't for the environment that we find ourselves in, we were, you know, we were on track to actually improve our margin. We haven't improved it, but our margin hasn't been crushed like a lot of banks have who are fairly asset sensitive. So, you know, we are down a little bit from where we were six months, nine months ago. but we're holding our own. And given the rate environment, if it stays like this forever and ever, that's sort of where the margin will be. And ROE should solve to, you know, 9%, 10% range. It's hard to take it at 12%.

And do you think, Raj, like coming into the downturn, the margin and just the funding mix played a role in terms of the gap between your ROE or ROT versus the group? Do you think as you come out, you expect the bank to be in line or better than peers from an ROE perspective?

Yeah. I mean, the difference, whenever we come out of this environment, rates rise. Is that what you're asking, Ibram?

I mean, again, I think if rates rise or if we remain in this lower for longer, do you expect that in both those scenarios, BKU should outperform or be better than peers? Yes.

I think so. When rates rise, you know, I'm expecting the way our margin behaves to be very different this time around than when rates rose last time around because our deposit rate is quite different already than, let's say, three years ago when rates started rising. And part of also, you know, why our margin is what it is is also our asset mix. We've been very careful with our asset mix. We have not taken a lot of risks. and that's why, you know, on a credit perspective, we feel much better than a lot of our peers do at this time. So, yes, but I'm being realistic in terms of, you know, when do we expect rates to go up again? I'm not expecting that anytime soon. That's the tough part of where we are. The slope of the curve is nice, but overall rates are just so low that, you know, the margin pressure on the industry is going to be with us for a while.

Got it. Thanks for taking my questions.

Thank you. I share no further questions in the queue. At this time, I'd like to turn the call over to Raj Singh, Chairman and President and CEO, for closing remarks.

Thank you so much, everyone, for joining us, giving us your time, listening to our stories. Like I said at the beginning of the call, I hope that 90 days from now when we speak to you again that we won't have another deja vu moment and won't be talking about the virus again. But we will be in a better place. But having said that, I do want to say, you know, despite all the noise you hear on the television, overall the economy has improved quarter over quarter and we're thankful for that and we're all benefiting from it. and hopefully you can see it better three months down the road. But, again, thanks very much. If you have any detailed questions, you know how to reach the last three and myself. Thank you. Talk to you in three months. Bye.

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