BankUnited, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Bank United, Inc. First Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today, Susan Greenfield, Corporate Secretary. You may begin.

Thank you, Tawanda. Good morning, and thank you for joining us today on our first 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 Securities Litigation Reform Act of 1995 that reflects the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including, without limitations, 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 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, 2020, and any subsequent quarterly report on Form 10Q or current report on Form 8K, 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. Thank you for joining us for our quarterly earnings. Let me talk a little bit about the environment before we talk about the results for the quarter. We talked to you about 90 days ago, so I'll try and draw comparisons to what I said 90 days back. I had an optimistic tone 90 days ago. I'm more optimistic today. What we're seeing, the data that is coming to us from every angle, whether it's around the vaccination and the pandemic or it's economic data across the board, we're seeing more reasons to be optimistic for the remaining this year and into next year than we were in January. In January, we were fairly optimistic to begin with. So the economy is opening up. Florida is clearly much further along than other parts of the country. New York is a little further behind than other parts of the country. But overall, our franchise, where we do business, we're seeing a lot of positive momentum. And then those assumptions then get reflected in our financials, which we will talk to you in some detail. but generally feeling very good about economic activity and about the economy opening up and the vaccine rollout. Within the company also, I will say that we are trying to gather data on how many employees have been vaccinated. It's self-reported data, so it lags a little bit, but we're kind of matching up with where the country is. So about 30% of our employees are either vaccinated or about to be fully vaccinated, and many more are in line. Most of the senior management team is now fully vaccinated. The quarterly performance, we reported net income of about $99 million, 98.8 to be exact, $1.06 per share. This compares to 89 cents that we reported to you last quarter. And obviously, this time last year, the first quarter was a loss of 33 cents. So going to come a long way in a short few months. The highlights of the quarter is, again, we'll go through a little bit about the P&L. I'll jump to the balance sheet after that. Net interest income continued to grow despite elevated levels of liquidity as is a problem across the industry. We had an I.I. of $196 million. This compares to $193 last quarter and $181 compared to the first quarter of last year. As we told you three months ago, we were positively – bias when it came to NIM guidance. NIM did expand from 233 last quarter to 239 this quarter. And that expansion really is a result of us executing on our deposit strategy. Deposits continue to grow and cost of deposits continue to come down. We had another very, very solid quarter. Non-interest DDA grew by $957 million. which I'm very happy about. The average non-interest DDA grew by $338 million. But the number that really makes me happy is that non-interest DDA now stands at about 29% of our total deposits. Just in December, we were at 25%. At the end of 2019, I think we were at 18%. And when we started this deposit-centric strategy about Three years ago, we were in the mid-teens. I think we were 14% or 15%. So we've come a long way, and I'm very, very proud of what the company has achieved. Cost of deposits also declined by 10 basis points. So last quarter, we were at 43. We're down to 33 basis points for this quarter. And I'm very confident that second quarter, we will again show a fairly decent decline. And the reason I can say that is because on March 31st, on a spot basis, we were already down to 27 basis points. So we're starting second quarter at 27. So, you know, the number is going to be somewhere in the mid-20s. And the guidance that we gave that we will drop our cost of deposits into the teams by the end of the year stands. So overall feeling very good about what we've been able to achieve on the deposit side. And the deposit growth was fairly widespread, came from every part of the bank. On credit, let me talk a little bit about loans. Loans were down about $500 million. Most of that decline was the continued drop in utilization rates on Unline. So I think $425 million off that $505 million was directly attributable to less utilization. This has been a negative surprise for us. We had made assumptions when we did the plan at the beginning of the year that the line utilization will start to normalize slowly month by month, but instead we saw further declines in January. We saw another decline further in February. It's only in March where we've seen a slight uptick One month doesn't make a trend, but it's a positive number, and we're happy to see that, and hopefully we'll see this stabilize from here on and start to get back to normal. So Tom will talk to you more about that, but that was what was the biggest driver. In terms of credit, let me go over a few things. Temporary deferrals and modified loans under CARES Act, modification under CARES Act, that total number remains stable at about 3% of the portfolio. NPA ratio declined. It was 71 basis points last quarter. It's down to 67. But if you actually exclude the guaranteed portion of SBA loans, it was 53 basis points. Charge-offs declined compared to all of last year. I think last year we were running at about 26 basis points at charge-off rate. We're down to 17 basis points this quarter. And for the first time since this pandemic hit us, criticized and classified assets also started to decline. And as we see more good economic data come through, more importantly, as we start to see cash flow data come through, I expect this number to start declining a little more rapidly in the second and third quarter. So overall, feeling pretty good capital. By the way, needless to say, we're in a very strong capital position. SAC1 ratio is at 13.2% for Holco and 14.8% for the bank. We did buy back some stock. We bought back about $7.3 million of stock this quarter. We still have a little less than $40 million left in the buyback, and we plan to execute it against that buyback opportunistically. It's a pretty volatile time in the stock market, so we want to use that volatility to our advantage and buy back when we see dips in the stock. We did declare a 23-cent dividend, and currently we're anticipating maintaining that level. Book value per share is now at $32.83. Tangible book value is at $32 even. Both are above the pre-pandemic levels. So strategy stays the same, continuing to add, you know, one quarter relationship at a time. continuing to focus on non-interest DDA. I'll give you an example, something that just crossed my screen late last night. We've been calling on this client for a long time, and we were finally able to pry it away from one of the biggest banks in the country. It's a mid-market firm based in Broward. The relationship is coming over. I won't say from which bank, but It comes with a half a million dollar loan and $26 million in deposits with a full suite of treasury management products. And a longstanding company, very successful in the community, and very happy to be a client of Bank United. So I see a deal or two like this every other day, and that's really drip by drip is what really adds to the franchise value, and we're focused on that. We'll also keep identifying niche markets and segments where we can grow. We're now shifting focus. We haven't hired very many producers over the course of last year through the pandemic, but we're now focused on bringing on more producers and are in discussions with a number of producers in different geographies. Very importantly, we'll continue to invest in technology and innovation. This actually, I do want to say... This quarter marks the culmination of our two-year journey, the cloud journey, as we call it. We are now officially out of the data center business. We are a fully cloud-enabled bank. It took two years to put everything in the cloud, and we partnered with Amazon. They've been great partners. And in terms of our capabilities, our infrastructure, and the capabilities that cloud provides us, we're in a very different place than we were two years ago. when we started down this path. Also, I want to announce that part of this was also the first cloud-native application that we developed, also a very big deal for Bank United because we never really had any developers. We never developed anything in terms of products for delivering our products. you know, deposit solutions. But two years ago, we decided that mobile banking is such a core function that we cannot just outsource it to the same vendor which every other bank our size goes to, that we needed to control this and needed to actually have this in-house. We put a lot of effort into developing it. It was developed, like I said, in the cloud, and we launched this just last weekend and converted our entire customer base with no issues at all and I'm very excited about this big investment that we've made. Also, let me talk a little bit about 2.0, and specifically 2.0 revenue initiatives. As you know, they have been delayed given the pandemic, but I'm happy to report that we are actually making progress and getting a lot of traction, all the various things that added up to that revenue target, whether it's a commercial card program, whether it's strategy management space, and you'll start to see some of that. You already are seeing some of that in our P&L, the public service charges and fees this quarter were up 17% compared to the first quarter of last year. This is, you know, a lot of that is coming from the 2.0 initiative that we put in place and more to come. Also, you know, the small business initiative that were also part of 2.0 are now going to pick momentum. Small business, as you can imagine, were distracted very much with PPP 1.0 and then PPP 2.0. As the PPP and everything related to that gets behind us, we're going to start focusing on that and start delivering on those initiatives as well. So overall, feeling pretty good. I think this is a pretty solid quarter. Tom and Leslie are going to walk you in a little more detail with the businesses and also the financials. Tom, why don't you go next?

Sure. Thanks, Raj. So let's talk a little bit about the deposit side first, and obviously another excellent, excellent quarter for us in NIDDA growth. And as Raj said, I think when we look back at this quarter, what's most satisfying is we're kind of building this wall brick by brick, and when we look at the results that you see in NIDDA, I think the thing that's most gratifying is how broadly it's based across our business lines and also just the number of new relationships that are contributing to this growth, which is where we're seeing the majority of the growth is just coming off of what we would call new logos for the quarter or across all business lines in kind of sweet spot type relationships for us that None are particularly jumbo. The one that Raj mentioned is a little bit larger, but just a broad number of small business, middle market, commercial relationships is really adding to this NIDDA growth. So average non-interest-bearing deposits grew by $338 million for the quarter and by $3.1 billion compared to the first quarter of 2020. On a period-end basis, non-interest DDA grew by $957 million for the quarter while total deposits grew by $236 million. So, we continue to allow more price-sensitive and broker deposits to run off as we've grown the NIDDA base so significantly. Time deposits for the quarter declined by a billion dollars. So, if you look at total cost of deposits, as Raj mentioned, declined to 33 basis points per quarter, 27 basis points on a spot basis, down from 36 as of December 31st, 2020, and reductions in cost of deposits continue to be broad-based across all product types and all lines of business. We continue to forecast, you know, good growth in NIDBA, good continuation of the momentum that we've had. Every quarter may not be as strong as this one, but we expect each quarter to be very good, and we also expect overall cost of deposits to continue to decline. As Raj mentioned on the loan side, we were down $505 million. Q1 is not typically a strong quarter for us. We did have $234 million of growth in the residential portfolio with the EBO Jenny Mae portion contributing $341 million. As Raj noted, the majority of our decline for the quarter was really attributed to line utilization. which is kind of hitting historic lows, but we anticipate that will pick up as we start to see, you know, the year unfold, the economy improve, you know, people start to use more inventory purchases and other things happening within the portfolio. One interesting side note, we looked at our numbers for the quarter and had we had a more historic level of line utilization, our commercial loans, our CNI loans would have actually been up. It would have contributed another $800 million of base into the CNI portfolio. So it gives you some kind of a dynamic for what the line utilization numbers look for. As we look forward in the year, we're seeing good growth in pipelines in Q2. As Raj noted, obviously increased economic activity among our clients. So we're anticipating As the year develops, we'll see growth in our residential teams, our small business lending, our commercial banking teams, core middle market teams, mortgage warehouse lending. So we expect the remainder of the year to develop more strongly than we saw in the first quarter. Just an update on PPP loans. We booked $265 million worth of PPP loans during the first quarter under the second draw program. In numbers of units, it's about a third of what we did in the first draw program. At this point, we're not accepting any more second draw PPP loans. On the forgiveness front, we forgave $138 million in loans that were made during the first draw program. We have about $650 million remaining outstanding under the first draw program as of March 31st. Switching gears a little bit, some additional details around deferrals and CARE Act modifications. Slide 16 in the supplemental deck also provides more details around this. The levels of loans on deferral or modified basis remain relatively consistent with prior quarter. In commercial, only $35 million of commercial loans were still on short-term deferral as of March 31st. 621 million of commercial loans have been modified under the CARES Act. Together, these are 656 million or approximately 4 percent of the total commercial portfolio, which is pretty consistent with the levels as the end of the last quarter. Not unexpectedly, the portfolio segment most impacted has been the CREE hotel book, where 343 million or 55 percent of the segment has been modified, also consistent with prior quarter end Residential, excluding the Jenny Mae early buyout portfolio, 91 million of the loans were on short-term deferral. An additional 15 million had been modified under longer-term CARES Act repayment plans as of March 31st. This totaled about 2% of the residential portfolio. Of 525 million in residential loans that were granted an initial payment deferral, 91 million, or 17%, are still on deferral. while $434 million, or 83%, have rolled off. Of those that have rolled off, 94% have either paid off or are making their regular payments at this time. As it relates to the CRE portfolio, I wanted to spend a little bit of time, as we normally do, going into some of the occupancy collection rates and some key data on some of the more impacted segments of the portfolio. So on average rent collection rates for the quarter, You know, we continue to see good strength in the office market. We saw collection rates of 96%, which were even for both Florida and New York. Multifamily loans were at 90% collection rate in New York and 92% collection rate in Florida. And retail has continued to improve and perform pretty well at 85% in New York and 99% in Florida. I think the big news on the hotel front is we're seeing a lot more strength in the hotel market. All of our properties in Florida are open and have been for a considerable period of time. Two of the three properties that we have in New York are open, with the third expected to reopen in June. Occupancy for the two hotels that are open in New York ran about 80% for March, and in Florida, occupancy rates For the entire portfolio, which is a little under 30 hotels in total, averaged 80% in March, with some reporting occupancy rates in the 90% range. For those that have tried to find a hotel in Florida recently, it's not so easy to find any place that's now open in Florida. So we've seen this improve from 46% last quarter, 56% in January, February was stronger, and and March was up to the 80% level, and we're seeing forward forecasts from most operators that continue to show strength as we start to head towards the summer months. From a franchise perspective, in the QSR portfolio, we're seeing the majority of our concepts are open, reporting strong, same-store sales, particularly those with good drive-through delivery, Pickup models, we still have a couple of concepts that are predominantly indoor dining that are challenged, but I'd say on a broad basis, the QSR portfolio is performing much better. Staffing is a challenge in this market. A lot of our QSR operators are reporting difficulty in bringing in staffing right now with stimulus payments and whatnot flowing through the economy. So the labor market is a bit of a challenge. But overall, revenue is strengthening in this segment. In the fitness segment, Planet Fitness, we have two concepts, as you know. Planet Fitness, 100% of the stores are now open with payment systems turned on. Retention is averaging 90% in that concept. And we now have all of our Orange Theory franchises open. There's been some decline in membership, but operators are still expecting a full recovery. Some of them are still operating at lower capacity levels due to social distancing, but we're seeing a sizable pickup in the Orange Theory franchises as well. So we're feeling much better about the QSR and franchise portfolio than we felt last quarter or the quarter before, so seeing a lot of strength there. So with that, Leslie, we'll get into a little bit more detail about the quarter now. So, Leslie?

Thanks, Tom. So as Raj mentioned, net interest income grew this quarter up about 1.5% from the prior quarter and up 9% from the first quarter of the prior year. The NEM increased to 239 this quarter from 233 last quarter in spite of elevated levels of liquidity on the balance sheet, so we were pleased to see that. The yield on loans increased to 358 this quarter from 355 last quarter. The recognition of fees on PPP loans that were forgiven added about six basis points to that yield this quarter compared to three last quarter. So if we pull that out, pretty flat quarter to quarter for the yield on loans. There's still $15.2 million of deferred PPP. I'm struggling with that this morning. Fees left to be recognized, and $6.3 million of that relates to the first draw program. The yield on securities declined by 9 basis points to 1.73 for the quarter. Spreads remain really tight in the bond market, as I'm sure all of you know, and we continue to experience an accelerated level of prepayments on some of the higher-yielding mortgage-backed securities. So those yields do remain under pressure. The total cost of deposits declined by 10 basis points quarter over quarter, with the cost of interest-bearing deposits declining by 13 basis points. We do expect that to continue to decline, given that the spot rate was 27 basis points at quarter end. It's going to be at least somewhat lower than that, so we will see an additional decline this quarter, although maybe not as much as we've seen the last two quarters. The cost of FHLB borrowings did increase to 232, as the borrowings that were paid down were short-term lower-rate advances compared to the hedged advances that remain on the balance sheet. In the aggregate, there's about $1.6 billion of hedged advances that are scheduled to mature over the remainder of 2021 with a weighted average rate in excess of 2%. And we continue to evaluate the economics and whether it makes sense to terminate some of the longer dated hedges that are out there. We do expect the NIM to continue to increase. We expect it to grow next quarter. It will be helped by PPP forgiveness, but even excluding that, we expect the NIM to continue to go up. Shifting gears a little bit to talk about CECL and the reserve. Overall, the provision for credit losses for the quarter was a recovery of $28 million compared to a recovery of $1.6 million last quarter and obviously a provision of $125 million in the first quarter of 2020, which was the quarter where we really booked our big provision related to the onset of COVID. The negative provision this quarter primarily resulted from an improving economic forecast, and within the forecast, the improvement in outlook for unemployment was the biggest driver of the reserve release. The reserve declined from 1.08% to 0.95% of loans, and slides 9 through 11 of our deck give some further details on the allowance. Major drivers of change, the reserve went down $36 million related to the economic forecast, again, primarily the change in unemployment. A decrease of $10.1 million due to charge-offs, most of which related to one VFG franchise loan that was having trouble even prior to COVID-19. A decrease of $12.8 million due to changes in the portfolio mix and the net decline in the balance of loans outstanding. $6.1 million increase in qualitative reserves. $9.6 million increase related to updates of certain assumptions, primarily updated prepayment speeds. an increase of $6.8 million related to loans that were further downgraded to the substandard accruing category. So those are the major components of the move in the reserve for the quarter. I do want to point out that the reduction in the reserve for the quarter was primarily related to the pass-rated portion of the portfolio. The reserve for pass-rated loans declined from $137 million to $93 million, while the reserve for non-pass loans increased from $120 to $128. So as we move forward, Our expectation would be if economic trajectory plays out as we think it's going to, we would expect to see some upward risk rating migration, and that would in turn result in some further reductions in the reserve. Some of the key economic forecast assumptions that drove the reserve, and I'll remind you that it's really a lot more complicated than this. This is a very high-level look at some of the data points that are in the economic forecast. National unemployment declining to 5% by the end of 2021 and trending down to just over 4% by the end of 2022. Real GDP growth of just over 7% by the end of 2021 and 2.3% for 22. The S&P 500 index remaining relatively stable at around 3,700 and Fed funds rates staying at or near zero into 2023. A little bit of detail on risk rating migration, and you can see a breakdown of all of this on slides 23 through 26 in the deck. Total criticized and classified assets declined by about 75 million this quarter, but we did see some migration into the substandard accruing category from special mention. We do, again, expect to see some positive tailwinds here if the economy continues to improve as we expect it to as we move through 2021. In terms of the migration to substandard accrual, the largest categories where we saw that were CREE, hotel, multifamily, New York, and office. Non-performing loans did decline this quarter from $244 to $234 million. Just to quickly wrap up with a look forward to the rest of 2021, to reiterate Tom's comments, we do expect non-interest DBA growth to continue. as well as total deposit growth, but our focus remains on non-interest DDA, and we're more than willing, given our liquidity position, to allow more rate-sensitive and broker deposits to run off. FHLB advances will continue to decline. Securities will probably grow in the low to mid-single digits, depending on our liquidity position. The provision, always the fun one to try to forecast. Under CECL, the provision should, in theory, be related to new loan production, while charge-offs should reduce the reserve. If we do see positive risk rating migration as we currently expect, we'll see some further reserve release related to that. Net interest income should be up mid-single digits over 2020, as should non-interest income, excluding securities gains, which tend to be episodic, and we don't make any attempt to predict those. And then with respect to expenses, I would say the guidance we gave in January has not changed. And with that, I will turn it over to Raj for closing comments.

Yeah, Leslie, I'll just add to your little color. This is a very hard time to try and predict what will happen. You know, we gave you guidance three months ago, and I look at various aspects of that guidance. On the deposit side, we're way ahead of what we thought we would do, to be very honest. This quarter was much better than what was in our plan. On the loan side, we had also expected that we'll start bringing in, increasing our line utilization. Instead, it actually declined. Now, with the exception of March, where it went up half a point, so it sort of went in the right direction a little bit, but December to Jan, Jan to Feb, it surprised us because we're seeing economic activity around us, but we're not seeing the line utilization. So, you know, I think guidance overall, you know, we still feel pretty good about, you know, where the trajectory will be for earnings. But in terms of, you know, deposit, I think we will outperform on the loan side. I think we said low to mid single digits. We'll probably be in the low single digits based on what we see now. And margin, we still feel pretty good. We've already delivered a nice expansion in margin and we'll continue to do that. So overall, I feel fairly good. I was in Miami for the first time after 12 months, two weeks ago. I spent a few days there, and just to see the hustle and bustle that I've been hearing about from everyone for the last several months now, but to actually see it and feel it, I will tell you that... If you are planning summer vacations, nobody can go to Europe. People are planning to go to either Hawaii or Florida or other places. Now is the time to book your hotels. You are not going to find any hotel rooms if you wait another month. That's how active Miami Beach and Miami generally is. So very, very positive trends that we're seeing. Some silly things also happening in Miami Beach, but that just comes with the territory. That's normal.

That's normal.

Spring break. But let's turn this over and take some questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 to ask the question. Our first question comes from the line of Dave Rochester with Compass Point. Your line is open.

Hey, good morning, guys. Regarding the loan trend for the quarter and the outlook for the year, I was just wondering what the main areas were where you saw the greater runoff in that traditional CNI book this quarter. And then just given your increased optimism, Raj, I was wondering, I know you mentioned you're looking for a ramp up there in a number of areas later this year. So just wondering where you're seeing the most new momentum right now in the pipeline at this point, and then how much larger is that pipeline versus last quarter? Thanks.

Yeah, so that's exactly the question I asked Tom yesterday. How big the pipeline is, you know, three months into this quarter versus three months into last quarter, and I think his answer was roughly two and a half times. But we're seeing the pipelines are much healthier in Florida than New York, as a general matter, but we're seeing New York also build up a little bit. But Florida is clearly ahead. And CRE, I would say CNI is further ahead than CRE, though Florida CRE is also coming along very nicely. So CNI and CRE, both of Florida, New York, some CNI. So we're... In terms of line utilization where it fell, it really fell. Actually, this was the quarter in which even the mortgage warehouse line utilization came down. But that is normal. Mortgage warehouse lending always slows down in the first quarter. In fact, I would say it didn't slow down as much as it has over any of the last five years that we've been in the business. First quarter is like you shut down everything in that business and utilization goes down into the 30s. We were still in the 50s, but it did drop from the 60s to the 50s. So the warehouse business, instead of helping actually hurt loan growth, but that's very cyclical. CNI lines were down, which is just, I think it's just a lot of liquidity in the system and not enough economic activity is what I would say. If economic activity is returning, the question is, you know, what happens with all this liquidity? How will that impact loan growth? And I don't think any of us know exactly. We're guessing. I don't think we've returned all the way back to normal. But, you know, we're, I think, 17 or 18 points below our utilization in the C&I business right now compared to pre-pandemic levels. So I'm not expecting all 17 points, 18 points to come back, but if half of it came back, it would be a pretty big number.

Yeah. And then I would also add a little bit more color on the first part of the question that you asked. If you went to our supplemental deck and look at page 14, I mean, it gives you a pretty good breakout of sort of our commitments by industry level. And if you look at the two largest, you know, that's where we saw – you know, a bit of a drawdown from a utilization perspective. And we're, you know, we're not seeing inventory build up yet at the wholesale trade levels. That was apparent. And in the finance and insurance segments, which are, you know, the largest part of our portfolio, we're not seeing, because of the liquidity in the system, we're not seeing as heavy utilization there. So those are probably the two, you know, biggest areas. And as we look forward to I think we're going to see, you know, growth in more core, you know, C&I-type markets. I think we'll see more growth in the wholesale distribution businesses as inventory levels start to build. I think we'll see more in health care over the course of the year. I think that will be a strong area for us. In the Cree book, you know, everybody – likes the industrial assets. And, you know, we have seen a good buildup in industrial assets. You know, Florida, as Raj mentioned, is doing well. So we expect to see multifamily buildup in the Florida market. And then the other asset class I think that, you know, we like as well as others, tends to be specialty office buildings around the healthcare and medical sector. you know, life sciences industry, I'd say those are the areas that we would expect to see growth the remainder of the year. As a relationship, I agree.

Yeah, yeah. In terms of loan growth, there's another more detailed point which, you know, some of you who've been following the company long will know. It was in third quarter of 2016 where we announced that we're going to start backing away from New York multifamily. Up until then, we were doing a lot of New York multifamily, and it's a five-year product for the most part. So we're coming up on our five-year anniversary of that phase in our sort of history where New York multifamily was the largest business line contributor to to the growth more than any other business line. So as that gets behind us, and I think we have one more quarter left, that runoff coming from those assets put on five years ago will be in the rearview mirror. And I think, you know, that's probably third quarter, if I remember it right. I think it was third quarter of 2016 when we did that. So that's a five-year anniversary, that big chunk that is still, you know, in our numbers in the decline, there's still a lot of that is coming from New York multifamily. So as that gets behind us, it gets easier in terms of, you know, not having to fight that tailwind.

Yeah. So it sounds like you guys are pretty well positioned for growth to accelerate in the back half of the year. Do you think that you'll actually see some growth in the second quarter, just given everything you're seeing right now?

I certainly hope so, yes. I think we're in a better place into the second quarter. Line utilization is one that I've stopped trying to guess. But it's getting into a place like how low can it go? It's already so low. So from that perspective, you know, I stay optimistic. But the pipelines is really what we can see and really be, you know, that sort of tangible stuff. And we're seeing our people a lot more active now than they were this time last quarter.

Yes. Great. Appreciate the color there. And, Leslie, on the NII guide, are you just assuming the current interest rate backdrop sort of persists through this year and that margin expands in each quarter for the remainder of the year?

So I'm not going to try to predict it quarter by quarter, Dave, because episodic things can happen. But I do think over the rest of the year we will see expansion. And, you know, sitting here right now, I expect it to expand next quarter, but whether it will go – Up, up, up, or whether they'll go up, flat, up, or up, up, flat, you know, it's hard to say. Yeah.

Yeah, that sounds good. It's a good trend to see there. And then maybe just one last one on expenses. You guys, Raj, you mentioned hiring producers now. I was wondering how extensive you're expecting that effort could be, and it sounds like that's all contemplated in the expense guide for the year. Does that remain unchanged?

Yes, it is, yes.

And in terms of how extensive you think that's going to be in other areas?

It is spread out. It's not in one concentrated area. It's not like we're doing a 40% list out in one area. It is spread out. My comment was more around that that was not the focus in the middle of the pandemic. So it really became a focus now in the new year and we're in discussions with various producers across the franchise. But over the course of nine months, starting March to December of last year, I don't think we hired any producers. Maybe we may have hired one or two here and there, but we were not really – that was not – it just wasn't – it's just hard to do that, especially when you're telling people you can't really go out and meet clients. What do you do? You hire a producer and do what with them? So I think it's the only time in the history of the company that we didn't hire for so long.

Sounds good. All right. Thanks for all the call, guys. Appreciate it.

Thank you. Our next question comes from the line of Ben Gerlinger with Hovde Group. Your line is open.

Hey, good morning, guys. Good morning, Ben. Hi. I was wondering if you could just kind of take a big picture view. You've always been a great commentator on the animal spirits of the market. So in your opinion and thought, if line utilizations are low, and economic activity is supposed to ramp up from current levels, do you think that you'll start to see continued loan growth, or do you think that people will start using their deposits? I'm just trying to get a sense of how you think that current loan-to-deposit ratio mix might go going forward and how sticky those new deposits really truly are.

Yeah. If this was only based on economic activity, I would give you a very emphatic guidance that loan growth is going to be very robust. The problem is that it's based on not just economic activity. It's based also on how much cash is in the system, and we know there's tons of cash in the system. And that's not going away anytime soon. The Fed is not going to pull cash out for probably another year, two years probably. So that's what makes it hard to guess exactly what the behavior will be. The economic activity and the liquidity in the system both drive loan demand. Economic activity is definitely coming back. We're seeing it every day. But the other question is much harder to figure out as to what that impact will be, which is why I cannot give you a very robust or emphatic guidance for loan growth. And I think... even in the first quarter. There has been more economic activity in the first quarter versus fourth quarter. But we didn't see line utilizations because people are just sitting on a lot of cash.

Gotcha. Yeah, that's helpful. And it's obviously really difficult considering we haven't experienced something like this in 100 plus years. So I do appreciate that color. If we could kind of transition a little bit more to the reserve and the credit outlook, I get that everything is trending in the right direction. Florida is phenomenal in terms of aspects relative to the national average. So when you guys look and you said positive cash flows and things to that extent are a big factor, being that the kind of 3Q into 4Q was good, 4Q into 1Q was good, so the trend is definitely positive direction. I was just curious on what you guys think your current reserve could really trend down to. I get that it's a function of loans themselves and that has remixed a little bit. So I was more so curious on that loan or the reserve to loan ratio and kind of what we might see if next quarter or the next couple quarters kind of continue this trend as directed by Moody's.

Yes. And I would say that high level, big picture, if portfolio composition remains relatively consistent, obviously to your point, if the mix of loans changes dramatically, that could be a factor here. But if portfolio composition remains relatively consistent over time, I think we'll see the reserve trend back down to closer to where it was on the day of CECL adoption. particularly if we're moving back towards a similar economic environment to what existed at that time. To tell you exactly when we might get there is pretty difficult, to be honest with you. But I would say it will move back towards those levels, provided we are, in fact, moving back to that type of economic environment. And so that was around 59 or 60 basis points at that point in time.

Okay, that's really helpful. And then my final question kind of comes from a little bit more so the deposits and fees. That continues to ramp up pretty good, but as you kind of expand out relationships and areas of the economy are continuing to improve, Do you think we've kind of hit back to that high watermark and it's more so a connection of the business growth itself? Or it's more so a question on, like, has everything lapsed in terms of kind of that forgiveness and we should continue to see it back on its standard growth rate?

I'm not sure forgiveness is really having much of any impact on the deposit picture. At least I don't think that's a big driver here. of what's going on with deposits. I think we remain quite optimistic about non-interest DDA growth, and that's really a function of, you know, Raj gave you a couple of anecdotal examples of the kinds of clients that we're onboarding and, you know, the strategy in that regard. So I think given that, we're very positive about continued non-interest DDA growth. In terms of overall deposit levels in the system, unless the Fed does something very active to pull liquidity out of the system, this cash is going to stay in the system. It may move around from the balance sheet of one bank to the balance sheet of another and back again, but I think we continue to be optimistic about non-interest DBA growth going forward. Is every quarter going to be a billion dollars? Well, no.

I'll add to that. There may be 100, 150 million. It's hard to say exactly how much, but some benefit from the PPP loans that we just did. You know, people do take those loans and put them in DBA. So there may be $100 million, $150 million in that range, and that will bleed out over the course of the next few months. The other thing I will say that also has helped DBA, we've made changes not only to our deposit pricing, but also to our earnings credit rate on credit management products. So as those have come down... and have come down fairly aggressively, clients have to either then start paying fees or they have to hold more DDA as compensating balances to cover those fees. So that also is up to the client what they want to do, but one way or another, it either helps our DDA levels or it helps our fee levels. So some clients choose to hold more DDA, other clients choose to just pay the fees and you're seeing that benefit come through in both places. So there's some of that also in the numbers, but a large part of this, what really gets me excited, or gets all of us excited, is that we're seeing more and more new business come in, new clients, new accounts, new relationships, expanded relationships, And then when the clients are here, the operating activity that those clients are performing and the wires and ACHs and how they're engaging with us, that is just going up and up and up, and that's a very, very positive trend. You don't see those in the numbers. Those are not balance sheet P&L numbers, but those are in our dashboards every day when we see how much activity is happening in the back office. That is really, really good news.

Ben, I would also add, you used the word segment, which is very important. When Raj, a few years ago, when we were at 14.6 or whatever the number was as a percentage of total deposits in NIDDA, when he laid out the growth strategy for trying to get to a 30% number, which seemed like a huge undertaking at the time, also a lot of it has to do with analyzing segments. I mean, you don't do it accidentally. You know, we have spent a good deal of time and energy and effort focused on, you know, the segments that tend to be more deposit-rich oriented. And so new relationships is a part of it, but also new relationships, you know, different industry segments as we look through them offer you different levels of deposits based upon the businesses, you know, that they're in. So a lot of our you know, focus has really been around driving calling activity and new relationship activity in what we perceive to be, you know, deposit-rich industry segments and deposit-rich relationships, you know, as a first level priority. And so you get both the combination of the level of new relationships that we're seeing across the board is very encouraging and but it's also the selectivity of what we're pursuing and how we think about, you know, focusing on products and services and relationships around, you know, a variety of industry segments that tend to lead to high levels of NIDDA.

Gotcha. Yeah, that's really helpful. Thank you, guys. And a great start to the year, and I'll step back. Thank you.

Thank you. Our next question comes from the LAMS. of Abraham Poonawalla with Bank of America. Your line is open. Good morning, Abraham.

Good morning, Leslie. Good morning. Most of the questions have been asked and answered. I think the one big question, Raj, it feels like the last five years you've transformed from the franchise. It's optimized from an efficiency standpoint. You're winning market share. At the same time, everything that we hear from your peers is there's a lot more chatter around M&A consolidation. and kind of setting franchises up to take on large banks, fintechs, et cetera. Just talk to us in terms of where your mind is at in terms of being open to something large, transformational from a deal standpoint as you look forward as opposed to the kind of organic strategy that you've talked about and you've been executing on for the last few years. Yes.

Yeah, Ibrahim, I'll sound like a broken record because I've always said this for the last four or five years and even before that. We're building the bank organically. We don't try and think about doing a deal every day because when you start thinking in those terms, you lose focus and you lose You never make these multi-year investments and multi-year efforts. This whole deposit transformation didn't happen in a year. We were in the fourth year of this journey. So when you think M&A, you start to think very short-term. I know there's a lot more M&A happening. As I predicted in a call or two ago, that there will be a lot of pent-up M&A that will happen. Listen, if the right deal comes along, we keep our eyes open for those. We do engage in conversations. But a lot of these deals that are happening, they're less than exciting. It's the only thing I can say. They generally fall into the category of I'm out of energy and out of ideas, so what can we do? Let's sell the bank and see if that does something. But, and everyone just basically hides behind that we need scale to spend on technology. Here we are spending on technology. We are creating things that, you know, would be helpful at scale, but it's not like you cannot do them without scale also. So, we stay focused. 90% of our efforts is focused on organic growth. 10% of our eyes are fixed on what can be done inorganically. I don't want the world to be surprised someday if we do something, because it's not like we never ever discuss, we never ever talk about this. A lot of our organic growth ideas often come when we look at other banks and say, they're doing this, why can't we do that? It's just hard to say when and where and what circumstance a deal will happen. Even this last quarter, we were engaging on one very small deal and one mid-sized deal. Either of them didn't go anywhere. One is still in consideration, very, very small. But we just have a very high bar for taking that risk of doing a deal. The operating risk and all the chaos that comes with it, it needs to be really compelling strategic sort of rationale that would make us take all that operating risk.

That's helpful, Raj. I guess as a follow-up to that, when you look at sort of what kind of stocks are being rewarded by investors are those that have some differentiated growth profile. And when I look at, I mean, I get the slow start to the year for you and the rest of the industry. Are there options that lead you to become more of an above-average growth player when you think about top-line revenue growth, loan growth, in terms of team hiring or some niches that you can get into. Just give us a sense of how you're thinking about that.

Yeah. See, there are cards that you play that you have in your hand right now, which is basically the business lines that we have built over the last few years. And then there are cards that you may pick up off the table for the next two, three, four years. So you're talking about those cards, and we're always researching what is the next business line, next product, next service, next geography to look into. And the ones that you have in your hand, listen, if we were just a residential player and had a big mortgage origination business over the course of last year, if we had gotten lucky by having that business model, we would have made a lot of money over the last year, much more than we did. But on the flip side, it could be some other business which got hurt a lot more. So it is, you know, a lot of those businesses are cyclical. and I'm spending a lot of time thinking about sort of beyond the mix of businesses we have today, what is the next leg of expansion, and I'm not talking about geographic expansion, I'm talking about product and business segment expansion, that we should venture into. What will fit our culture? What will fit our risk appetite? And what is it that we can be successful at? We don't want to get into businesses and try and compete against Bank of America and pretend that we can win in, let's say, capital markets or something like that. But there are niches that we're studying very, very carefully and when the time is right, we will announce them. But the mix of businesses you have at hand, you have to basically play to what the environment is. You're not going to try and grow businesses that are impacted by the pandemic. You're going to try and shrink them, which is what we're doing. But then others which are doing well have been benefiting from the pandemic, like take a warehouse business, you want to be aggressive and grow them, which is exactly what we've done.

Go ahead. Makes sense. Thank you.

Thank you. Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is open.

Hey, good morning. Hey, maybe just circling back to the BKU 2.0 and how that was delayed really with COVID. As you reengage on that, What should we be looking for in terms of fees and then maybe on the expense side, does that switch to bring the mobile platform in-house? Is that sort of incorporated under that BKU 2.0, and is there any expense savings as a result of that?

Yeah, so that was actually not part of BKU 2.0. That was outside of it. So was the cloud initiative. Those are both outside and committed to just before we started 2.0. So there are other things like the small business initiative that's in 2.0 which was delayed and is only wrapping up as we speak. Any small business initiative in the middle of a pandemic you can imagine, right? The only kind of small business lending that happened over the last 12 months was basically PPP. So as that gets behind us, small business initiative will start to pay off and that should generate both loans and deposits and fees over the course of time, and it's also a cost-saving tool as well because we automated a lot of that process. In terms of the overall 2.0, the $60 million number we put out there, 40 was expenses. We already got there and then some a while back. It's the 20 in revenue, which is what we had been delayed on, and now it's beginning to come through. it's not one big thing that I can point to you. It's not like, okay, 10 of that 20 million was this number and we're almost there. It's a lot of little things like deposit service charges, which, again, in itself is made up of a lot of little things. It's the commercial card program and the interchange fee we expect to earn. It's the small business initiative and a whole host of things that make up that. So it is delayed, but it is not, you know, put aside. It is certainly achievable and deliverable, and we're already beginning to capture that. But I can't give you, like, one big thing to say, okay, here's the, you know, the age of that 20, which is right here. Leslie, maybe, you know, you can shed some light into it.

I think that's exactly right, Raj. It's a combination of commercial car, treasury management initiatives, small business initiatives. There's some little small things, but those are probably the big three from a revenue side. We're already starting to see those gain traction. We thought we'd be to the finish line with that sometime mid-2021. Add a year to that. COVID took a year out of our lives. You asked about Does the new mobile app save money? No, that was not about a cost save. That was about delivering a higher quality customer experience. And part of the increase that you're seeing in the P&L and the technology line is the cost of that initiative running through the P&L that were capitalized originally. So that really wasn't about cost save. The cloud strategy, on the other hand, is delivering cost saves, helping to offset some of those investments that we're making.

Okay. So in that $20 million of sort of remaining revenue over the next five quarters or so, we should think that that gets, you know, we leg into that over that period of time? Yeah.

I think that's fair.

Okay. And can you just comment on, you know, sort of the, you know, we talked about the huge amount of excess liquidity, you know, at BKU, but in the system. How is that impacting loan pricing? You know, there's loan demand pretty... pretty limited right now, but obviously a lot of competitive pressure out there. Is that really negatively impacting pricing? What are you seeing on new loans?

Absolutely. I mean, you see it in the bond market and you see it in the loan market, and especially on the higher end of the credit spectrum. So for investment-grade and very highly rated borrowers, pricing has been very, very tight. and that's actually one of the differences between three months ago and now also is that the kind of pipeline, one, the pipeline was smaller than what it is today, but also the pipeline back in January looked very much full of clients who could do deals at LIBOR plus 100, LIBOR plus 125 levels, which are very difficult for us to make any money on. But now we're seeing more middle market companies, more sort of what is our meat and potato business and not K.P. Morgan's meat and potato business. Those kinds of businesses tend to be priced much better and allow us to make the margin that we need to have a decent return on capital. So, but yeah, the liquidity in the system, especially if you have, if you're a very well-rated borrower, this is a great time to borrow, and that is impacting margins.

Yeah, I would also add that a lot of the activity that we saw in the first quarter, I mean, there's always sort of loan demand. It's the question is, do you want to be a supplier of that demand, you know, at that price and at that risk level, but A lot of what we saw in the first quarter in terms of deals that we looked at were, you know, refinancings of investment-grade type public sector debt, you know, university, you know, school debt, and, you know, our desire to be in, you know, 15- and 20-year fixed-rate loans that were non, you know, derivative hedged at, you know, $140,000. fixed rate was just not really very great, to be honest. And so we saw a lot of business where there were 14 or 15 respondents to RFPs, and all 14 or 15, when we responded, we were 15 out of 15, because our desire to book business that we didn't view as profitable was not great. But there was a lot of that activity was there. in the first quarter because I think other elements of the CNI book were not there. So a lot of people put on some dollars in that category, but it's not at sort of the return levels that we would want to see in the portfolio. So I think as we see more CNI, the more classical CNI business start to come on in subsequent quarters, we'll also see a better relative rate and quality mix.

Okay, thanks. And then just finally, you were mentioning in the comments hiring producers in, were you saying in new geographies or in existing geographies? And if it's new geographies, where are those? Is that southeast or nationwide?

No, this is mostly in our existing geography. Okay, thanks.

Thank you. Our next question comes from the line of Steven Scouten with Piper Sandler. Your line is open.

Hey, good morning, everyone. Good morning. I'm curious on the share repurchase, Raj. You mentioned, you know, obviously you have just under $40 million remaining. I think as you guys have talked about it previously, kind of traditionally go to your board in these $150 million cadences. So how do you think about the share repurchase with the stock at these levels and alternatively, What do you see as kind of the best uses of the excess capital beyond the share of purchase today?

I think when we got the share buyback sort of unfrozen, I wouldn't say, let's just call it reauthorized, I think our stock was at 35 or 36 in that range. I could be off by a couple of dollars, but it was in the mid-30s somewhere. And we came out and we started buying back stock. And, you know, Leslie and I, we don't trade like, you know, we're investment managers. We kind of give some guidelines to our broker, and they execute every day a little bit. But those parameters that we gave them became irrelevant very quickly because the stock, within a matter of two or three days, I think, It went from the mid-30s to beyond $40, and then eventually it even hit $49, almost $50. So we've adjusted, I think, a couple of times. We looked at adjusting it a couple of times, but it just felt like it was getting ahead of itself. Not because I don't think the stock is worth anything less than $50, but it's a very volatile time. One piece of bad news I know can move the market by 5% or 10% these days. So as those signs come up, we will be very aggressive in buying very, very quickly. That's not Bank United stock. It's just the whole market is behaving that way. So we've been now in the blackout for some time. And as we come out of the blackout in a couple of days, Leslie and I will put our heads together and we'll give new guidance to our brokers to go execute again. But this 40 or whatever 37, 38 million that is left will get used up fairly quickly, I would think. And then my expectation is the board will, again, approve another 150 million. They like to do 150 at a time, which is fine with us. And the minute this thing is used up, we will be back for another 150 million. Because as you can see, capital levels are, you know, I don't want to say they're the highest they've ever been, but they are pretty high.

Yeah, no, for sure. You guys have clearly plenty of capital here today, so that's helpful, Raj. And then maybe just a higher-level question. You guys have done a very good job really transforming the bank over the last few years, banking out of 2.0 and several other initiatives, and the balance sheet transformation has been significant. But as you look at it moving forward and kind of how to get the bank to maybe more peer-like profitability, What do you see as the clearest path there, the maybe easiest steps you might be able to take or focus on from here to get to where you want to be?

Yeah. So I think we are doing what was the hardest thing in terms of getting to peer-level profitability, which was getting our cost of deposits in line with peers. That's where we were the furthest away. I think we're pretty close to getting that done. We'll certainly, by the end of this year, be in a very good place from that perspective. 30% DDA, you know, cost of funds in the teams, that's a pretty good place to be, but that was the biggest undertaking. The second on the interest income side is, you know, how to have an extra 50 basis points of yield on what we have, and that will basically require changing the mix of loans, which is taking on a different risk profile. We were not willing to do that over the last three, four years, because we kept talking about that this is the end of the business cycle, this is not the time to go and take new kinds of risks. But now we feel differently, and we're analyzing what the right business mix would be for us going forward, from a risk perspective, and where is it that we want to take incremental risk? So I don't have anything to announce to you today, but that's something we're analyzing every day, as to what is it that we want to grow, and what is it that we want to not grow so much, to change the profile. Well, you know, the thing that, you guys know that's really under my skin, is that comparison when people do to our return on equity or tangible equity to others' return on tangible equity. Our return on equity or return on tangible equity is the same because we don't have a lot of intangibles. We've never done many deals or any deals. So when that gets compared to most banks who are serial acquirers, or in other words, serial intangible creators, their return on tangible equity is better, because you use up their capital one day, your capital is lower the next day, and you have more earnings from what you just bought, and suddenly you can say, look, our return on tangible equity is great. In other words, don't look at what we spent on buying the earnings stream, just look at what we bought. So that, I get annoyed by that comparison. Compare our return on equity to anybody else's return on equity, we're not just middle of the pack. We're actually pretty far ahead. But going back to margin, I think the deposit work is getting done, and on the lending side, I think it's a good environment to be thinking about if and how we want to change some of the lending links.

Okay, great, Raj. That was a super helpful answer, and I'm sure you guys are glad you did indeed hold off on taking that additional risk into the pandemic. So congrats on that as well. Yeah, thank you.

Thank you. Our next question comes from the line of Stephen Alexopoulos with J.P. Morgan. Your line is open.

Hey, good morning, everyone.

Hi, how are you?

I wanted to start on the deposit transformation. So if we look at the increase in DDA, it's very impressive, but it's happening at a time where customers, consumers and businesses are all sitting on more liquidity, which makes it pretty tough for outsiders to gauge how much of this improvement has come from these initiatives. Are there any other metrics you could share in terms of how you're progressing, maybe number of new DDA accounts opened or new commercial accounts?

You know, Steve, that's a good thought. And it's actually something we're giving some thought to, is are there some more meaningful metrics that we could be sharing along those lines? I don't have that in front of me right now. Obviously, we want to be sure we're pulling together what's most meaningful. I don't know if number of accounts is really all that meaningful. Maybe number of, you know, we have sort of an internal metric that we talk about, number of new logos is which is the number of new business customers that we've brought. And we've given some thought to whether we want to start sharing that. I think that we haven't made it public yet. We didn't set it up to the point that we're comfortable making it public.

Yeah, we even talked about sharing some operating data, but there are a lot of issues that come up with sharing that, like just how many wires are going through the bank, something as basic as that. But on that front also, I know what we're trying to do with wires going forward. So the trend will look awesome.

Hopefully that number goes down.

That number will eventually go south as we make some changes to our technology platform. But if we showed you that, so there's been a lot of discussion that that is an accurate way to show some non-financial data. and if it's going to be relevant and useful for shareholders. But we haven't really landed on anything yet that we've published. But we are having that discussion, especially taking up, I think, on your question from two earnings calls ago.

Yeah, I think some things will be forthcoming, Steve. We just want to make sure we're using both the most meaningful metric and we want to be sure the data around those non-financial metrics is as reliable as it needs to be before we put it out in the public realm. So, you know, both of those things are kind of in the hopper.

Well, what I would say, Steve, is that we see, you know, we see the tangible results, right, every day. And I would tell you that the level of results being driven by new relationships and key target segments that we're focusing on is the primary driver of the NIDEA results that you're seeing.

I would agree with that. And I don't think anybody knows, Steve, this is not a Bank United isolated statement. There's a lot of liquidity in the system. And I think it's unprecedented in terms of both the amount of it and the reason it's there. So I don't think anyone at this point has great confidence in their prediction about what happens to that over a long period of time.

I would agree with that. I guess it would just help us as we're trying to assess how far you've really gone with fixing the outlier on deposit costs. If you had some outside metrics to share, that would be helpful.

I think it's a fair point, and it is something we're spending some time on internally, so I think at some point you'll start to see that. But like I said, we want to be sure, A, that the metric is really the most meaningful indicator, and B, that that the number's right, to be honest, and so that we have the ability to repeatedly produce it reliably.

Yeah. Well, when you see growth coming from a large number of relationships that, you know, are relationships that are 90%, you know, treasury management-oriented relationships where you have, you know, five, six products sold into that client base and it's a stratification level where it's not, you know, any one huge individual account. It gives you more confidence as it relates to the long-term duration of those relationships.

That's helpful. I'm curious, in regards to Florida just being more open than other parts of the country from an economic view, that's actually a good leading indicator. To that end, what are you hearing from commercial customers in Florida? are they now starting to look more actively at investing, expanding, hiring more, or is the mentality we're in a pandemic, it's just time to still be hunkered down?

No, that's not what you said. Yeah. Not just investing, expanding, and hiring, but also acquiring.

Yes. We're seeing an uptick in M&A activity. The Florida commercial mentality right now is very positive on all fronts.

Okay. So to the degree that you now see loan growth at the lower end, say low single digits versus low to mid, is that really just a function of where we are now, the starting point? Or do you expect less of a bounce up in the second half than what you assumed before?

Steve, I think it's primarily the first. You know, the first quarter was obviously disappointing from a growth perspective. And, yeah, it's a starting point that's lower than where we had hoped to be at this point in time.

Yep. Thanks for all the color.

Thank you. Our next question comes from the line of Brady Gailey with KBW. Your line is open.

Yeah, thank you. Good morning, guys. I heard you say that CNI line utilization was down 17 or 18 points. I'm wondering where that sits as a percentage now? Like what is the line utilization as a percentage?

That's something we just never really disclosed. And I think if I gave it, you know, I think without the context of a lot of history, it wouldn't be very meaningful. But we've never made that public.

Just to clarify, just to make that clear, it's 17 points from pre-pandemic levels now, not just this quarter, right?

Right, right. It was down about 6% this quarter.

Okay. And then, you know, as people start to look at inflation and higher rates, I'm just wondering if Bank United is going to be more asset sensitive, you know, through the next period that we see higher rates. I mean, your deposit base is better. You've remixed the loan portfolio. I remember multifamily used to be like 20%. Now it's down to 6%. Do you think you'll be more asset sensitive the next go around when we start to see higher rates?

I mean, I will tell you, Brady, the balance sheet is more asset sensitive now than it was. But our risk appetite for interest rate risk, we've never been one whose strategy to make money is to make a bet on rates. We will probably continue, you know, our board has given us a mandate to manage interest rate risk to relatively low levels, and I don't foresee that changing. So I don't think we will make a big bet one way or the other, although the balance sheet is more asset sensitive today than it was last time we went through a rate cycle or pre-pandemic, but I don't see us making a big bet on rates and positioning us either to be extraordinarily asset-sensitive or extraordinarily liability-sensitive.

Okay, great. Thanks, guys.

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

Thanks. Good morning, everyone. Good morning. Hey, so I just wanted to ask, you know, last quarter you said that you could get the cost of deposits to, I think, the low 30 basis point range, and it looks like you've been able to do that pretty early on. So I'm curious if there's any update there or if that outlook would change over the next two or three quarters.

I think I'll stand by what I said, which is by the end of this year we will be in the teens. and cost of deposits will continue to drop up until this time next year. That's as far as I can see. The pace of drop, it's not going to be 10 basis points a quarter that you just saw this quarter. It will start to slow because there's only so much you can get down to. But I'm more confident about making it into the teens than I was even three months ago.

Got it. Thanks. And then just looking at the average securities book, I think this is the first time we've seen a decline in at least a little while. Was that just prepayments overpowering the ability to find new paper, or was that deliberate? And what should we expect over the next couple of quarters?

The former. Yeah. It's a difficult market. Our chief investment officer said, At some point during the last quarter, it came to me and said, I just can't find anything I want to buy. This is a guy who lives to buy bonds. It's just a very difficult market. Spreads are very tight to find something, to find the right things. We are purchasing securities, but you're right, prepayments have continued in a rapid clip. I do expect the bond portfolio to grow in the near term. Some of that's going to, you know, we had a lot of cash on the balance sheet at quarter end. We're attempting to deploy that. But some of that's going to depend on how much loan production we can do as well. I would rather make loans than grow the bond portfolio right now.

Got it. All right. That's all I've got. Thanks.

Thank you. Our next question comes from the line of Stephen Dulong with RBC Capital Markets. Your line is open.

Hi, good morning, guys. So just back to Steve's question earlier, just on deposits, do you get a sense of how much your average balance per DDA account has increased today versus, say, pre-pandemic?

Yeah, and that's something that we've never disclosed publicly, and I don't have those numbers in front of me

Generally, I'll make a statement that the push has been to go lower, as in find smaller clients rather than larger clients, mind small business and middle market versus corporate, because from a price sensitivity perspective, the smaller the relationship, the better you'll fare and rise in great environments. Generally, the marching orders and even the incentive plans are designed in such a way to incent smaller clients mid-sized depositors rather than really big ones.

Got it. Thanks, Raj. And you guys have done really, you know, a phenomenal job with the deposit side. You know, now you're looking at down to mid-teens for the cost of deposits. But maybe if we look at just total funding, you know, your funding costs is, I have it around 64 basis points. That's coming down from last quarter. So given your DDA growth, the $1.6 billion in hedge advances rolling off, time deposits rolling off too, where do you think total funding costs could fall to by the end of the year?

I don't have that in front of me, but obviously the cost of those FHLB advances is going to probably not come down in the aggregate because what's going to be left is going to be the higher rate ones, but they'll be a smaller part of the mix. So in the aggregate, that'll have a positive, you know, the roll-off of that $1.6 billion in hedges will have a positive impact on, you know, on the aggregate cost of funds, although not necessarily on the cost of FHLB advances considered in a vacuum because what little amount will be left will be higher costs. And I do expect the balance to come down given our current liquidity positions. We do still have time deposits that are going to roll off that are at higher rates. We have maybe half a billion that's going to roll off in the next few months that's priced still at over 1%. And then some additional amounts that are going to roll down, not nearly as much of a gap as that, but that are still priced at above our current offered rate. So you will see overall And as DDA continues to grow, the mix will come down, but I don't have an exact number forecasted in front of me right now.

Got it. So with all that liquidity and the cash balance, you could basically essentially let your borrowings and your time deposits roll off if loan growth is not there. Is that a fair assessment? Sure.

If loan growth is not there, absolutely. I mean, we're optimistic about loan growth being there.

Right, right.

Yes.

Okay, great. And then just one last one, just on the GMA purchases, do you think you'll continue on with this level or is it kind of just the supply may not be there?

It's hard to actually grow it. And, you know, the plan is to grow and add other servicers to our existing list but exactly where the market will be, we'll find out, but I'm actually fairly optimistic about that business.

Okay, great. I appreciate the color. Thank you.

Thank you. Our next question comes from the line of David Bishop with Seaport Global. Your line is open.

Hey, good morning, guys. How are you?

Good.

How are you doing?

Good, good. Hey, Leslie, sort of... piggybacking on Chris Key's question there about securities. Sounds like there's obviously appetite to add there. It looks like based on averages versus end of period, you added there. Just curious, and your yield sort of held in better than we had modeled here. Just curious where you see overall portfolio yields on the investment securities trending here in the near term with the additional of these bonds at tighter spreads.

Yeah, I mean, what we put on in the first quarter came in between 140 and 150. However, I will say we're still keeping duration very short. So we could improve that a little bit by adding to duration. I don't know how much of an appetite we have for that, but it is a point of discussion. But I do expect some of that excess cash to move into the bond portfolio over the course of the second quarter. Unless, as I said, the loan pipeline really picks up and we're able to deploy it that way because I would trade some of those bonds for loans right now.

Right. Got it. And I know it's obviously a very fluid and flux situation depending on the direction of the economy or so, but obviously first quarter credit trends move in the right direction. Net charge-offs well below the level of the past three quarters or so. Any sense as you look forward, you know, 2021 versus 2020 overall loss content where you can see those trending here over the near to intermediate term?

You know, charge-offs are really difficult to predict, particularly the timing of them. I do think, obviously, we are not seeing charge-offs materialize to date. You know, they've been episodic in nature. They haven't been, you know, broad or systemic. You know, this quarter, as I said, it was really one loan, and it was a loan that's been, you know, a company that's been struggling since back then. pre-pandemic, and I'm sure the pandemic didn't help, but, you know, they continue to be episodic. They're very difficult to predict. I can tell you what our model says, but I don't know how valuable that is, you know, based on that. You know, certainly, you know, 40 basis points-ish, but I don't have a high, you know, that's what the model's spitting out. I don't have a high level of confidence in that because the model can't predict the timing of charge-offs. And we do think the trajectory of the economy is going to continue to improve. And if it does improve, as our current economic forecast suggests, I think we will see some migration out of those criticized classified categories back up into the past portfolio.

Got it. Appreciate the color. Then Raj, one follow-up on the BKU 2.0, at least on the revenue side there, impacting the fees. Do you have in the back of your mind where you'd like to see fee income sort of pencil out as a percent of revenues? I'm just curious. Of the $20 million, how much is sort of in the run rate at this point?

I don't have a target number for you that this is what will make us happy in terms of, you know, fee, income, total revenue. I know a lot of, especially larger banks do that. I'll give you a very, you know, generic answer, which is higher. I would like it to be higher than what it is. But at the same time, I'm not trying to benchmark us to banks that are in very different businesses and say we want to get there. For example, a bank with a retail mortgage origination business will have a lot of gain on sale revenue which flows through free income. And if we chose to be in that business, which, as you know, we have chosen not to be. We used to be in that business, but we got out. because it generated revenue, but it just didn't generate enough returns. That's often the issue we find with free businesses. It's either that they need scale at a very different level than where we're at, so, you know, wealth management, capital markets kind of fall into that category, or it's businesses that generate free revenue but not, you know, bottom line, which is, again, you know, at least for us, the residential origination business ended up being that. or let's say mortgage servicing. At one time, we were in the mortgage servicing business as well, but we chose to exit that because it just needed a very different level of scale. So, I mean, free businesses, for us, our primary source of fees is deposit and loan fees, and that is what a lot of 2.0 is trying to increase. A commercial card is, you know, call it a treasury product, but that is also going to go through, you know, you'll see that fee build up in there. I don't think we have officially disclosed exactly where we are with the $20 million in terms of, you know, are we halfway there or not, but, you know, Leslie and I can talk about that and maybe we'll start sharing that in a little more detail for the next earnings release. But we haven't yet achieved the $20 million. We're a good six or 12 months behind in hitting those targets. And like Leslie said, we expect to get there probably around this time next year or middle of next year.

Got it. Then one housekeeping question for you, Leslie. Good tax rate to assume moving forward?

I would say in the neighborhood of 25%, excluding anything unusual in the way of discrete items that might

Got it. Got it. Appreciate the color.

Okay. Thank you. Our next question comes from the line of Christopher Marinak with Janie Montgomery. Your line is open.

Thanks. Thanks for taking everyone's questions this morning. Just a kind of outlook question as it pertains to the PPNR relative to the balance sheet. Do you see that ratio, which is about 115, 116 basis points, do you see that getting a lot bigger the next year? I mean, I know the company's changed a lot, and I'm not sure how comparable this ratio is kind of pre-pandemic. So I'm curious where you want to go.

I'll be honest with you. That is not a ratio that we've ever measured. Maybe that's a good idea. That'll be a takeaway, but that's not a ratio that I've ever really been focused on. Maybe it should be. But that's not a ratio that I'm struggling to answer your question because it's not something that we really have measured and tracked very diligently. That would be my takeaway. I would hope it would grow, but I don't have a projection of it in front of me that I can speak to.

Sure. Understood. Great. I'll circle back on that. And then just a quick one, Raj. As you've entered new markets like Atlanta, is there a deposit component that you expect to see down the road here?

Absolutely. So when we announced our efforts in Atlanta or if we get into, you know, another market, it's always a combination of loans and deposits. It's never just a loan production office because we're defining – You know, relationship business is one where people eventually give us their operating accounts. Relationship may start with a loan, but it has to eventually end up with a deposit. So deposits will always be part of it.

Great. Thanks for all the information this morning. We appreciate it.

Thanks. Thank you. And we have a follow-up question from the line of Dave Rochester. Your line is open.

Hey, sorry to make a long call even longer here, but I just had a quick follow-up on the Bank M&A questioning earlier. Hear you loud and clear on your messaging there, on your approach. But I was just curious, just given all the deal announcements recently, if you guys were seeing any noticeable pickup at all in inbounds or interest from larger banks looking to pick up some scale in Florida and looking to partner up to do that. Thanks.

Yeah, I'll give you a generic answer, which is this year the activity will be higher, and there is more talk this year than last year. Last year everyone was so focused on just getting past the storm, and now everyone kind of feels they are past it, and there is certainly more dialogue up and down the food chain in Bank M&A world.

Okay, great. Thanks again, guys.

Thank you. I'm sure no further questions in the queue. I will now turn the call back over to Mr. Singh for closing remarks.

Well, this certainly has been a long call, so I'll just say thank you very much for spending time with us and listening to our story. You know how to reach me and Leslie anytime you'd like. Otherwise, we'll speak to you again in 90 days. Thank you. Bye.

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