BankUnited, Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the BankUnited, Inc. Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Susan Greenfield, Corporate Secretary. Thank you. Please go ahead.

Thank you, Dwayne. 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 Securities Litigation Reform Act of 1995 that reflect 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 around the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks, uncertainties, and assumptions, including, without limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by the COVID-19 pandemic. The company does not undertake any obligation to publicly update or review any forward-looking 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, and 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 was cautious. I just want to remind everyone where we were. It was July, and we had seen the worst of the virus behind us. The recovery in New York was doing well, but Florida was beginning to spike in cases pretty sharply, which made us quite nervous at that time. The good news is that spike was controlled, numbers came down, and we did not see an impact on the economy in Florida; economic activity continued well. Here we are 90 days later, and I feel like this is déjà vu. We're seeing a different kind of spike. This time, it's not so much in Florida or New York but overall in the country. I'm hoping this is just déjà vu and what follows on the economic front will also be déjà vu so that we will not see much of an impact like it happened three months ago. I hope this does not resemble Groundhog Day where we are talking about this 90 days down the road again. So with that, I would like to say that our sentiment towards the economy is cautious optimism. A number of things have gone in the right direction over the last quarter compared to what happened in Q2 and Q3. We are happy and optimistically looking at those numbers. At the same time, we are exercising a big dollop of caution given the uncertainty that still exists with the virus and the political realities. We have an election in less than a week, and the stimulus situation still feels like it is being discussed forever without resolution. With that, I would like to showcase our earnings over the last three months. We came in with $66.6 million of earnings for the third quarter at $0.70 a share. If you compare that to last year, we were at $0.77 a share this quarter, and compared to the last quarter, we were at $0.80. The Street expectations were in the low- to mid-60s, so we performed slightly better than expectations. Given that this is about six months from the biggest shock to our economy in living history, I think 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 the last quarter. Leslie will discuss this in more detail. There is no one big thing that points to it; it just reflects a million dollars here and a million there that adds up to a slight decline compared to last quarter. But compared to last year, our PPNR for this quarter was $115 million, up from $102 million last year. For nine months, our PPNR was 3.23%, compared to 3.09% for the previous year. As I have always noted, from quarter to quarter, there can be volatility in both good and bad directions; you shouldn't look at any one quarter on an annualized basis, and having at least a 12-month view will even this out. The big story here before I discuss credit is our balance sheet and deposits. We had another strong deposit growth quarter, with DDA growing by $906 million, marking a 15% growth over the last quarter. Our DDA deposits now represent 26% of total deposits; just two and a half years ago, we started pushing DDA and were in the mid-teens. That's a significant improvement in our deposit portfolio. Our cost of funds has decreased to 57 basis points, a drop of 23 basis points. The change in mix has helped, but we are also running off a lot of the CD book, while simultaneously bringing down the money market and savings rates, which contributed to this reduction in our cost of funds. The average at the end of the quarter was even lower, as Leslie would confirm; I think it was 49 basis points. So, we ended the quarter starting at that 49 basis points, and based on what I am seeing in the first few weeks of the quarter, the trends from the third quarter continue. Expect continued growth in DDA, along with a solid decline in cost of funds. Regarding the loan portfolio, as of last quarter, we reported $3.6 billion or 50% of the loans originally granted a three-month deferral. According to the latest update as of October 25th – that's the last day we could make changes before finalizing – commercial loans had much of the data reflected as of September 30th. For the residential data, $983 million or 4% of our loan portfolio was either on a 90-day deferral or had modifications or were in the process of being modified. Excluding those technically deferred loans that show pain, if I back those out, the $983 million reduces to $788 million or 3.3% of loans falling into these buckets. This compares to 15% who were granted the initial 90-day deferral. I'll quickly discuss the P&L here, and again, Leslie will provide deeper insight. NIM declined by seven basis points from $239 million to $232 million, largely due to a decrease in our investment portfolio as all our excess liquidity has been directed there rather than into the loan portfolio. Investment portfolio grew by $607 million while loans declined by $69 million. Loan demand remains weak, with the exception of residential loans, where we saw growth in both warehouse and residential business lines as well. Provision this quarter was $29.2 million, comparing to $25.4 million last quarter, which is basically in line. Reserves are currently at 1.15%, compared to 1.12% last quarter. So pretty steady here. Book value increased to $31.01, close to pre-COVID levels. A positive note is that we have seen continued improvement in OCI. After having a significant mark on the investment portfolio in March, where we were looking at a negative $250 million mark, it improved to just negative $2.5 million last quarter, and now is a positive $62 million. This has aided in picking up book value and tangible book value. Our capital segment stands at 12.1% at Holdco and 13.5% in the bank. We continue to pay our $0.23 dividend, which we increased back in February. Regarding share repurchase, we are not yet buying back stocks as we still believe we need more optimism and stability before we initiate this option. This will be part of discussions at the Board meeting in November and again in February, but my expectation is it will be at least until the first quarter before we revisit this given the current economic uncertainties. Now, discussing nonperforming assets, our NPA ratio is down slightly from 258 basis points compared to 260 last quarter. If you exclude the guaranteed portion of SBA loans, it is at 46 basis points compared to 47 last quarter. NPLs are still at 84 basis points. Year-to-date net charge-offs are running at 25 basis points; we took a charge-off of $24 million this quarter, and $22 million of that pertained to one credit we've been discussing for some time. That credit entered workout status around this time last year. Collecting nicely every month, we were bringing down the balance, but with COVID, payments stopped, shifting from what was thought of as a credit loss to essentially a fraud loss. We are now in litigation pursuing the guarantors, and we've taken substantial charge-offs, fully reserving for this loan. We are experiencing risk rating migration into the substandard accruing category as part of our proactive approach; when we observe any risk, we call it out and do not delay recognition. Operationally, we continue to work remotely, selectively reopening certain offices in Long Island and West Chester; allowing about 20% of staff to return as a test, it remains voluntary, and all precautionary measures are in place to ensure safety. At the moment, much of our employee base operates from Miami Lakes, and we don't anticipate significant changes there for a month or two. While not much has changed on the 2.0 front, we've launched a new commercial card program and are expanding our treasury management suite of products. Our team’s priorities remain focused on credit management and long-term DDA growth. Our goal is to operate effectively as a bank that facilitates transactions, demonstrating the results of our efforts over the last two years. While this quarter was expected to yield modest growth due to tapering from PPP funds, we observed nearly $1 billion of DDA growth despite the challenges of social distancing. With that, I will turn it over to Tom for some insights on the balance sheet, and then Leslie will take over.

Great. Thanks, Raj. I'll start off with deposits. We certainly weren’t hiding under our beds with deposits, as demonstrated by the fact that we had a DDA growth of $906 million for the quarter. Beyond that figure, it was encouraging to see the same trends we experienced in the last quarter and the quarter before. This growth is truly broad-based across all operating teams and business lines, significantly contributing to this strong quarter of $906 million. We continue to allow high-cost deposits to run off for the quarter, decreasing time deposits by $843 million, which left us with a total deposit increase of $527 million. Raj mentioned the PPP deposits; it's tricky to be precise, but we estimate about $300 million of our current base of non-interest DDA is related to BU PPP loans, where we still see the proceeds in borrowers’ accounts. A good portion of that has been utilized, but we estimate about $300 million remains on hand. As Raj pointed out, the cost of total deposits was reduced to 57 basis points this quarter. At the spot rate, the APY on total deposits was 49 basis points as of September 30, down from 65 basis points on June 30 and 142 basis points at December 31, 2019. The spot rate on the interest-bearing deposits was 65 basis points on September 30. The reduction in cost of deposits was broad-based across all product types and business lines, showing a methodical effort that will continue moving forward. As of September 30, 2020, $1.5 billion of CDs, at an average rate of 1.67, has yet to reprice since the last fed cut in March. We expect to see the majority of those reprice in the next couple of quarters. Additionally, some CDs that matured and repriced early in the current cycle will likely reprice again at their next maturity. Regarding the loan portfolio, total loans declined by $56 million in the third quarter, presenting disparate results across different areas of the bank. We observed continued growth in the mortgage warehouse business, with outstanding balances growing by $90 million for the quarter, while commitments grew by $357 million to an all-time record for us as of September 30. Conversely, in the more standard commercial areas of the bank, C&I loans declined by $254 million, as new originations were not sufficient to offset prepayments and lower line utilization. Currently, line utilization from corporate clients is at a historic low for the bank, which we believe from a credit quality perspective is likely a good thing. CRE also experienced a decline of $97 million for the quarter, as the New York multifamily portfolio continued to contract, although at a slower pace than observed over the past 12 to 14 quarters. Balances in Pinnacle BFG-Franchise and equipment also decreased by $161 million for the quarter. As we look forward, we expect these trends to persist and anticipate total loans will likely decline in Q4, leading to an overall growth rate for the year in the low single digits. In our previous discussions, we elaborated on our credit side strategy, which remains highly selective regarding new originations until we feel more confident about the long-term trajectory of the economy and the effects of the health crisis. We are increasing facilities to existing clients and observing growth in specific companies within mission-critical sectors where M&A activity is more favorable. Our caution pertains to completely new relationships, as the ability to assess and interact with those clients has become limited. In terms of PPP, we have recently opened our portal and are starting to process forgiveness applications. We expect PPP forgiveness to primarily occur in Q1 2021. As of now, 38% of our PPP loans by unit count are under the $50,000 level, ineligible for the SBA expedited forgiveness process. Now, let's delve into some deferral information, referring to Slide 16 in the supplemental deck. We will analyze two time frames: the first as of September 30, and another as Raj mentioned, updated as of October 25. From a commercial loan standpoint, $234 million of commercial loans remain subject to the first or second 90-day deferral request. As of September 30, $246 million of commercial loans were modified under the CARES Act, with another $220 million currently in process of modification. The total of this amounts to approximately $700 million, or roughly 4% of the entire commercial portfolio as of September 30. This figure is consistent with the $696 million reported on our commercial loans during the last quarter related to second deferral requests. As of October 25, we see improvements in this area with $152 million of commercial loans in short-term deferral starting to resume payments; loans on short-term deferral have declined to $74 million and those modified or in the process under the CARES Act total $493 million. Overall, this reduced total to $567 million from 4% to 3.2% of the total commercial portfolio by October 25. The segment most impacted includes our hotel portfolio within the CRE business line, where 47% of the sector was on deferral or had been modified as of September 30. Notably, 12% or 76% of the franchise portfolio was also on deferral as of September 30, a decline from 74% that received the initial 90-day deferral and 25% for which a second deferral was requested when we reported at the end of the second quarter. The trend has shifted from 74% to 25% to 12%; from the $76 million in short-term deferral as of September 30, a positive note is that $74 million of that $76 million has resumed payments in October. Turning to the residential portfolio, excluding the Ginnie Mae early buyout portfolio, $395 million in loans are on short-term deferral, with another $21 million modified under longer-term repayment plans as of September 30. This represents 8% of the residential portfolio, down from $594 million or 13% of the portfolio as of June 30. Importantly, 49% or $195 million of residential loans on deferral continue to make payments during the deferral process period. I want to provide insights into the real estate portfolio and discuss rent collection trends during the third quarter. For our sampled loans in the office segment, rent collections are averaging in the 90% range in both Florida and New York. Multifamily projects are performing similarly, averaging in the low 90% in both markets. Conversely, retail properties are experiencing significant variability in rent collections, with high-quality properties and larger loans in the 90% range, while poorer quality properties see collections in the 40% to 45% range, varying based on location and asset type. The industrial segment continues to perform excellently, nearing 100% rent collection. In terms of hotels, all our hotel properties in Florida are open, which is encouraging. Two out of our three properties in New York are now also open. In Florida for Q3, we see occupancy rates generally in the 40% range, peaking at 45% for September, while some properties with a leisure focus are seeing even better rates. New York is still struggling due to a significant decline in business travel, as only two out of three properties are opened, but occupancy rates are starting to show some improvement. Regarding franchise restaurants, varying trends are observed depending on service models, where properties with delivery and drive-through capabilities are witnessing double-digit year-over-year increases. In contrast, casual dining remains challenged, often struggling with same-store sales declines. Fitness centers are experiencing improved numbers with 84% of our financed stores now open, with membership and utilization rates gradually increasing, particularly in locations that opened six to eight weeks ago. This summarises the loan portfolio situation perfectly, and I will pass it over to Leslie for a deeper analysis on CECL and quarterly results.

Thanks, Tom. So, I know you guys are all eager to dive into another conversation about CECL, so let me start there. Overall, the allowance for credit losses increased from 1.12% of loans to 1.15% this quarter. I'll refer you to slides 9 through 11 of our supplemental deck, which detail our economic forecast and changes in the reserve composition. Several offsetting factors influenced reserve changes. We saw a $10.6 million increase related to the economic forecast, despite an overall improvement in economic conditions. Our economic forecast committee opted for a forecast scenario this quarter that was slightly less optimistic than last quarter, which drove that increase. Charge-offs totaling $23.8 million reduced the reserve, while risk rating migration and increases in specific reserves formed a $27.3 million net increase to the reserve. We achieved an $8.1 million reduction in our qualitative overlays, partially offsetting the increase from risk rating migration, as some of those qualitative components are being captured within the quantitative reserve. Despite this, we felt it prudent to retain a significant portion of the qualitative overlay introduced last quarter due to ongoing uncertainties surrounding the virus, the election, and other variables. Regarding our key economic forecast assumptions, our models incorporate a vast array of national, regional, and MSA-level economic data. The chosen forecast discusses national unemployment levels increasing to just above 9% by the end of 2020 and averaging 8.4% throughout 2021, with a continued decline. We project a real GDP decline of 4.3% for 2020, rebounding to an aggregate increase of 3.5% in 2021, while the S&P 500 index will hover near 3000 into 2021 and then trend upward. Furthermore, we anticipate the Fed funds rate to remain around zero at least until 2023. The franchise finance portfolio maintains the highest reserve level at 4%, followed by CRE at 1.6%, and C&I at 1.3%. The reserve on the residential portfolio increased from 19 to 27 basis points this quarter, mainly due to shifts in the economic forecast, particularly related to unemployment projections which sensitively affect the model. Slides 23 through 26 in the deck detail risk rating migration for the quarter, which, as expected, has changed given the current environment. Our total criticized and classified assets increased this quarter. Specifically, we witnessed a net decline in special mentioned loans of $386 million while substandard loans rose by $816 million. Most downgrades resulted from migration from special mention to substandard. We observed the largest increases in the CRE retail and hotel segments. In terms of classified assets, there was a total increase of $276 million, which includes an $168 million decline in special mentions and a $445 million rise in substandard assets, mainly driven by deteriorating patterns in the hotel and retail property types. Nonperforming loans have remained relatively flat quarter-over-quarter, totaling $200 million as of September 30. As expected, we continued to see recovery in the fair value mark on our investment portfolio this quarter. If you recall, at the end of Q1, we were experiencing about a $250 million net unrealized loss, which improved to a mere $3 million by June 30, and as of September, the portfolio experienced a net unrealized gain of $62 million. Unfortunately, NIM declined this quarter to $232 million from $239 million. Previously, we had predicted flat results in that regard. The primary factor influencing this decline was liquidity being deployed mostly into our bond portfolio, which, while improving net interest income overall, was not beneficial to NIM. We witnessed a 22 basis point decline in yields on interest-earning assets, with a 10 basis point decrease in yield on loans, and a 48 basis point drop in the yield on investment securities. This was due to coupon resets on floaters, prepayment of higher-yielding mortgage-backed securities, and the acquisition of new securities at lower rates. This quarter, the average rate on our purchased debt securities was about $150 million, spanning from just under 1% for some agency floaters to just below 2% for some private label securities. Our commercial loan origination rates for this quarter were between $330 million and $350 million. Furthermore, total deposit costs dropped by 23 basis points quarter-over-quarter with interest-bearing deposits declining by 26 basis points. It's worth noting that the costs of our FHLB and PPPLS borrowings increased by 24 basis points this quarter due to the shorter-term lower rate loans being paid off, leaving higher-rate loans remaining on the balance sheet—many of which are hedged. Most hedges will expire throughout 2021. Shifting to non-interest income and non-interest expenses impacting PPNR this quarter, we saw a decrease in gains on loan sales as our SBA machine has been primarily occupied with PPP loans over the last few quarters. Lease financing income has also trended downward, likely to continue due to lower rates on re-leased assets. We observed an increased deposit insurance expense directly related to an uptick in classified assets impacting our assessment rate. On a positive note, we maintain a robust liquidity position and haven't experienced liquidity stress since the onset of the pandemic, which is consistent with trends across the industry. I'll provide some expectations for Q4. For NIM, we anticipate flat results, with the possibility of a couple of basis points increase as total deposit costs continue to decline. While we expect yields on earning assets to keep decreasing, we believe NIM will stabilize even as we grow the bond portfolio. From a balance sheet perspective, Tom expects a net contraction in loans in Q4, but a possible increase in the residential portfolio, with year-over-year loan growth anticipated in low single digits. We expect deposit growth to be challenging to predict accurately, but anticipate growth in total deposits and non-interest-bearing DDA in Q4, alongside some continued runoff in the time deposit portfolio leading to low double-digit deposit growth for the year. Expect continued securities growth in Q4 as liquidity deploys into the bond portfolio. For expenses, we expect them to remain relatively flat compared to Q3 but could adjust variable compensation expenses in Q4, based on the full-year results. As for provisioning, it mostly hinges on our economic forecast in December. Unless there are any negative developments in that forecast, additional provisioning in Q4 will focus mainly on risk rating migration or changes in specific reserves, which could go either way—too early to predict right now, but I do not foresee overarching reserve builds moving forward. Expect a slight decline in the tax rate in Q4, from 20% to 21%. I will turn it over to Raj for any closing remarks.

Thank you for your patience. We tend to take a long time providing substantial information we find relevant. Let’s open the call for questions and discuss anything you'd like to delve into. Operator, you may initiate the Q&A session.

Thank you, sir. [Operator Instructions] Our first question comes from Jared Shaw from Wells Fargo Securities. Please go ahead.

Hi, good morning.

Hey Jared. Good morning.

Maybe just sticking with credit, or starting with credit, Leslie heard your comments on provisioning for the fourth quarter. But as we look at the loans that you've proactively already risk-rated down that are still on deferral, as those come off deferral or 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 potential additional risk rating migration, or is it really -- you've already internally risk-rated those the allowance that captures that? And as we see any charge-off or any type of restructuring, there shouldn't be a big impact to the provision.

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 don't want to 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 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 in the current situation. So it's a pretty fluid situation.

Okay. Thanks for that color. And then just shifting to the deposit side; one, I guess when you look at the growth that you've been seeing how much of that is coming from that national deposit group versus 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 we can go. Clearly, there's 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. There is a lot of runway for us to take this down; a 23 basis point reduction is something lower than that. To your first question, I would say the growth in DDA and total deposits is pretty widespread across New York, Florida, Nashville, everything contributed. There wasn’t a single location to which I can attribute it. This has been consistent for some time now because we focus heavily on this across the board. The only thing that is shrinking is the retail CD portfolio, which we're handling deliberately.

Okay. Thanks. And then just finally for me, any more specific update on what you're seeing in the New York City multifamily and retail side? 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 strengthening?

Tom, do you want to talk about that?

Yes. I would say first, 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. If you look at our multifamily portfolio today in New York, it's about $1.2 billion, just a little over that. We expect to see that continue to decline with fourth quarter maturities, but the overall performance in that portfolio is good. Our portfolio is predominantly in rent-regulated type units, and modest exposure to free market is where you're seeing higher-level vacancy numbers. So when you look at national headlines about vacancies in the New York multifamily market, they tend to throw out one number that is not indicative of all segments and all geographies within New York. Therefore, we foresee that portfolio continuing to decline a little bit, likely down another $70 million or so, depending upon what maturities look like in Q4. The retail component is a little tougher; we are seeing some improved trends in rent collection, but retail in New York is certainly going to be more challenging until the economy starts to progress again. Our exposure does not lie in what you’d call high street retail, which is notably the most challenging part of the retail market; Madison Avenue, Park Avenue type properties are not really our retail exposure. Instead, our focus lies mainly in smaller retail connected to some of our multifamily exposure. Those tenants are generally working with asset owners to facilitate payments through plans, so our smaller local tenants are paying two or three times a month, which allows collections to improve. However, national retailers often act aggressively to postpone payment, placing pressure on a higher percentage of larger tenants. Thus, our smaller local tenants are taking a more cooperative approach.

Okay. Thanks a lot.

Thank you. Our next question comes from the line of Steven Alexopoulos from JPMorgan. Please go ahead.

Hey, good morning everyone.

Good morning, Steve.

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 strong deposit growth coming at a time when just about every bank has strong deposit growth right as customers have sat 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?

Yeah. I don't know how you do that.

Yes. We track new account, new client, new logos kind of internally for that. We see healthy new logo generation across all of our business lines, and we can say that while we noticed larger corporate accounts holding excess liquidity, our new logo success across business lines is historically strong.

We also conduct transaction activity analysis on the accounts to understand what may be excess funds versus operational funds, but those numbers aren't ready for public disclosure yet. However, the liquidity in the system is evident, and it will likely fluctuate as companies start investing these funds. We wait for the Fed to address the overarching liquidity in the system, and they aren't indicating any intentions to act at this time.

Another way to evaluate this is to look at the transactions flowing through the bank, which are growing significantly. Not just this year, but they've been consistently increasing over the last three years, indicating operational metrics backing up these results. While we don’t provide specific figures, we keep these metrics under internal observation because it's important to prioritize investing in operational support as transaction volume increases.

Okay, that's helpful. And Raj, as we think about 2021, it seems like the industry will struggle with pretax pre-provision growth. I understand you said the low-hanging fruit on the expense side has already been addressed. While I'm not looking for guidance, do you think there’s still enough to manage on expenses so that we could see at least some pretax pre-provision growth next year?

Yes, there is still room for improvement. Though it is difficult to quantify and commit to specific timelines. For example, one of the initiatives of 2.0 was automation, and we undertook the automation of 15 different functions, but we aim for that initiative to become embedded within our corporate culture; constant innovations should occur. Unfortunately, many manual processes still exist within the company, and while we’ve addressed the lesser tasks, we now face the more complex projects. We will continuously analyze processes to automate more tasks. We're also reviewing our branch footprint once the new normal is established to determine if we can consolidate a branch or two—essentially evaluating the new user's expectations as people return.

We have also launched our commercial card program as planned. Revenue from that has yet to become substantial, but some additional fee enhancements should positively impact PPNR in the coming year.

Okay, so it sounds like you're fairly optimistic regarding growth initiatives while also being mindful of expenses. Would that be a fair representation?

Yes, to the best of our ability to read the current environment, I would say that.

Thank you. Our next question comes from Stephen Scouten from Piper Sandler. Please go ahead.

Can you hear me now?

Yes. How are you doing?

Okay. Sorry. So thinking about Slide 10 again, Leslie, you went through 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 and the specific reserve. I just wanted to tease that out a little 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?

Almost all of it. Yes, the charge-off is -- the charge-off reduced the reserve. That had already been provisioned and really didn't have much effect. We did do some additional provisioning around the remaining balance of that loan this quarter, which is part of the $27.3 million. 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 migration to substandard accruing.

Okay, great. Helpful. 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 haven’t realized any fees from forgiveness this quarter and we aren't building any into next quarter. I think there is, 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 all for the fourth quarter.

Okay. And then maybe just the last thing for me, I know...

Somebody is looking that up. Go ahead.

Okay, great. And then just last thing on the hotel book. You noted I think two to three properties in New York City or New York open. I'm just wondering if you have any data available on those properties, New York properties in particular around LTVs, occupancy rates, and 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.

Yes, these are hotels that have some different purpose uses to them instead of having business travel coming to them. They're using them for workers and health care workers and things like that, because they are broad-use hotel concepts.

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 accrue?

Absolutely.

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

Thank you. Our next question comes from the line of Brady Gailey from KBW. Please go ahead.

Hey, thanks. Good morning, guys.

Good morning.

Good morning.

So if you look at the growth in the bond portfolio, bonds are now about 27% of average earning assets. Do you expect that ratio to continue to go higher? Do you expect to continue to increase 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.

Okay, all right. And then you mentioned the $1.5 billion of CDs at I think around 170 basis that will be rolling over. 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 C&I relationship that got, I think it's about a $20 million charge-off this quarter?

It's in litigation and I think it will be a while before we get resolved. However, like Leslie said, we fully reserve for it. We took a rather aggressive charge-off, but I expect it to be a long and drawn-out litigation.

What type of C&I loan was it, Raj?

It was a wholesaler distributor. We had the relationship for a very long time, but it started accelerating last year. We were collaborating with clients and indeed collecting $1 million a month effectively, ensuring the account was reducing. But under the pressures of COVID, what first looked like a credit loss increasingly resembles a fraud loss. We continue pursuing the guarantors and entering litigation. We've taken a significant charge-off and fully reserved for this loan.

Alright, great. Thanks for the color, guys.

I want to circle back real quick to the question that someone was looking up. I have an answer on how much deferred fees are less on the PPP loans. It’s about $17 million in aggregate.

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

Thanks, Leslie in terms of your reserves how would – 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. 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, it will have a negative impact, but it would come in through the economic forecast, Ken.

Got it. Okay, so it sounds like something is in there and that not getting it also might be a bit of a negative.

Okay. And then similar question, if this third wave of COVID cases that 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 impacts. But like the rest of us, they are estimating. I don't want to use the word guessing because I think they’re hopefully smarter than I am. But they're certainly modeling it and building it. Obviously, there's uncertainty around that, so their estimates and expectations may vary either way, but they are making a serious effort to incorporate these factors into their forecasts.

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

These are residential loans that we buy out of defaulted residential loans we've taken out of Ginnie Mae securitizations.

Got it. Okay, great. Thanks so much.

Thank you. Our next question comes from Brody Preston from Stephens Inc. Please go ahead.

Good Morning, everyone.

Good morning, Brody.

I just wanted to ask real quick, Leslie, you mentioned the hedges. I just wanted to better understand. Do you have 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 run off over 2021 quite evenly throughout the year. I believe there’s around $3 billion of notional on the balance sheet right now. As to the underlying borrowings, they will drop down provided we manage the liquidity situation well; they will re-price down, and they will reprice down significantly. We're working on it—if we don't need them for liquidity and we can manage it without having to roll them, we might unroll those.

Okay, great. And those are floating rate tied to LIBOR, correct?

That's correct. But they're hedged, so effectively we've converted them into fixed-rate borrowings, resulting in the interest rate not declining.

Right, right. I was just considering when they do re-price.

Yes, over the course of 2021. They should come down materially. However, whether they remain depends on our liquidity position and if we have a need for them.

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

This is hard to generalize. We have over 180 stores in that one concept that are in the price-sensitive area, similar numbers in other areas. They go through phases depending on when they opened and how long they have been operating. Most of these are small businesses. Recently, we had discussions with numerous franchisees as well as franchisors and saw that attendance is improving in some places, while it is more sluggish in others. Yet, if you take a broader view over all 300 stores, membership and utilization rates over the last couple of months are positively trending, indicating that we have improved our situation drastically compared to the previous 90 days. Only a couple of states remain predominantly closed at this moment.

Alright, thank you for that. And lastly, I just wanted to ask specifically about the New York City mixed-use portfolio. Has that improved in the last few months, or is it still a tough operating environment?

Yes. In these loans, we’re typically looking at smaller walk-up apartments over stores. We generally see performance on the apartment side. Primarily those have been rent regulated units so we've experienced a relatively good performance in that aspect, along with modest exposure to free market categories. The vacancies are a concern, especially considering the retail component, but we expect these properties will continue to trend downwards as we have around $284 million across this segment.

Got it. On average, what percentage of the rent roll is made up by the, I guess, the retail portion of the mixed-use?

I don't think we have that readily available. It would vary from property to property; I’d estimate it must exceed the 51 percent threshold for the portfolio to be classified under multifamily. Generally, 65-35% or 70-30% blends are often indicative, but historic debt service coverage ratios average in the 1.20 to 1.30 range. So the loss of a couple of tenants can have a significant impact on the overall cash flow of these properties.

Okay. Thank you for that. And I appreciate all the information you're providing today. Best of luck in Q4.

Thank you. I show 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 and giving us your time listening to our story. As I mentioned at the beginning of the call, I hope that 90 days from now, when we speak again, we won’t have another deja vu moment and won’t be discussing the virus once more. We’ll be in a better position, however, despite all the noise on television; the economy has improved quarter-over-quarter, and we are all benefitting from that. I'm hopeful that things will continue to get better down the road. Thank you all once more, and if you have any detailed questions, feel free to reach out to Leslie or myself. Talk to you in three months. Bye.

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