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

Thank you Victor. Good morning and thank you for joining us today on our fourth quarter and fiscal year 2020 results conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I’d like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflects the company’s current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks, uncertainties and assumptions, including without limitation those relating to the company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-19 pandemic. The company does not undertake any obligation to publicly update or review any forward-looking statements whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company’s annual report on Form 10-K for the year ended December 31, 2019 and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC’s website, www.sec.gov. With that, I’d like to turn the call over to Raj.

Thank you Susan. Welcome everyone to our earnings call. Thanks for joining us. I’ll start by talking a little bit about the environment and the economy, then we’ll get into our numbers. Since we last talked to you three months ago, really three big things have happened in terms of reduced uncertainty, and reduced uncertainty is a good thing, always a good thing. The first and foremost, and probably the biggest news of last year was the vaccine, which came out in November and is now being administered. Obviously we had the election uncertainty last time, we’re past that now. We also had the stimulus which, compared to the other two news, is small news but nevertheless positive news. We weren’t expecting a stimulus to get done until the new administration takes over, but I’m glad it was passed a few weeks ago. With that, as I look through 2021, it feels like a year with a very, very strong potential in the second half of the year, possibly starting as early as second quarter, but I do see a slow first quarter as all this good news is great, but it actually has to get converted into reality. The biggest risk obviously still remains vaccine distribution and, to some extent, a new variant of coronavirus. There is still some uncertainty around it, but a hell of a lot less than this time 90 days ago, so we’re feeling very good as we put together our budget for the year. We basically took assumptions that first quarter is always a slow quarter for us, but this year will be slow as well for all the reasons I just stated, but then pipelines start to build up and we start executing on a growth strategy somewhere in the second quarter, but really bringing it in in the second half of the year. Quickly looking back to this quarter, I’m very happy with the results. We announced $0.89 per share, $85.7 million in earnings - that compares to $0.70 last quarter, and if you compare it to fourth quarter of 2019, which feels like 100 years ago, it was $0.91, so not bad for what we’ve gone through this year to come out just very close to where we were fourth quarter of 2019 from an EPS perspective. NII was $193 million and change, which was $6 million more than our last quarter, about $8 million more than fourth quarter of 2019. PPNR was down by $10 million compared to last quarter but showed a little increase compared to fourth quarter of the prior year. Leslie will walk you through this, but there are some unique items in the expense category mostly having to do with compensation. We had reduced our variable compensation accrual quite dramatically in the second and third quarter, and we have adjusted that back up, not all the way back up. Variable compensation will also be much lower than in previous year, but just not at the rate that we were accruing in the second and third quarter. That’s one part of that adjustment. We made a change in policy to give additional paid time off due to the circumstance that we’re in to our employees - that cost a couple of million bucks, and then there’s an accounting thing which Leslie will walk you through. I’m not smart enough to walk you through that. The big story, obviously, continues to be deposit generation, as well as deposit costs. We had another solid quarter. Total cost of deposits declined by 14 basis points - we were at 57 basis points last quarter, this quarter we ended up at 43. If you look at our spot cost of funds at December 31, we were at 36, so in other words we’re starting this quarter already at 36 and working our way down from there, so I feel pretty good that this quarter will be another very strong quarter in terms of reducing cost of funds. I think we’ll end up in the low 30s and on a spot basis, I feel pretty confident that we will end up with a two handle. That’s the cost side, but also our average DDA, non-interest DDA grew by $966 million, which is again very, very strong. I will repeat what I’ve always said - one quarter doesn’t make anything. You should always look at a four-quarter or last 12 months numbers to really get a feel for how the business is doing. But no matter how you look at it, this last four quarters or the last quarter has just been a very, very strong performance on the deposit side. Our non-interest DDA now stands, by the way, at over 25%, and I think a year ago we were at 18%. Still more work to be done here. We are expecting this trend to continue into next year and for us to slowly work our way towards 30% DDA. As we had predicted, risk rating migration has slowed quite significantly. I think for the first nine months of 2020, there was downward rating migration on $2.1 billion in loans. This quarter, it was $169 million. Provisioning came down very, very materially; in fact, we have a net recovery of a small number of $1.6 million. Also, we had reported back in the summer $3.6 billion in loans that were on deferral, if you remember. That number is now down to $207 million or about 1% of total loans. We do have $587 million in loans that were modified under the CARES Act. As you know, under the CARES Act, these don’t show up as PDRs, but nevertheless. These modifications, by the way, are mostly IO modifications for nine to 12 months. A lot of these modifications are in the CRE, the hospitality portfolio, the hotel portfolio, and we believe that most borrowers who are going to come to us for temporary relief or deferral have been identified at this point. NPLs ticked up a little bit to $244 million, which is about 1.02% of loans, but excluding the government guaranteed, sort of SBA loans that are in this bucket, if you take that out, it’s about 80 basis points. In our C&I sub-segment, actually, NPLs declined. The net charge-off rate was stable at 26 basis points for the year. Let’s talk a little bit about NIM. Last time we met on this call, we talked about NIM being stable, maybe slightly up, which is exactly what happened. NIM was 2.33 for the quarter, I think last quarter it was 2.32, so one basis point improvement. Total loans grew by $87 million and deposits grew $899 million total, of which $219 million was non-interest DDA. These are spot numbers. What I gave you earlier was average DDA. Book value is now up at $32.05, which is higher than what it was at this time last year, it was $31.33. Capital position is strong. The Board met yesterday and reinstated our share buyback program. If you remember, when we stopped it we still had about $45 million left, so that already has been unfrozen and then the Board wants us to get through this and then we’ll meet again to talk about additional repurchases. CET1 is at 12.6% at holdco, it’s 13.9% at the bank, and we of course declared our usual $0.23 per share dividend. Strategy for return to work, let me talk a little bit about this and going forward. Not much has changed in terms of our positioning for return to work. We still are working remotely and we expect to do that for at least the next two or three months and then make a decision beyond that at that time. There have been more COVID cases in the company, as you would expect, in this quarter but in previous quarters, but none that are serious enough to have impacted any of our operations. The strategy going forward, again we’re waiting very anxiously for economic activity to pick up and for us to start participating in the next business cycle, which as we speak is beginning right about now. The focus will stay the same, which is to build a relationship based commercial bank with a focus on small and middle market businesses, stay focused on building core business through non-interest DDA, identifying niche markets that the big guys don’t pay much attention to, investing in technology and innovation and not just in branches and locations. The game has really become about technology and solving customer pain points through innovation. Also, we haven’t lost sight of all the initiatives we had in 2.0 - that was not just an exercise and time that you do and then forget about. It really was about changing the culture, and we will keep pushing forward on that front as well. We did launch a new initiative earlier last year. We did not make a lot of big deal about this, but I do want to mention it on this call. It’s called ICARE, which stands for Inclusive Community of Advocacy, Respect and Equality. It is something that has been in the works since summer of last year, but we really announced it inside the company about two, two and a half months ago and have gotten very positive feedback. It really is our effort as an organization to push and build a culture that celebrates and intentionally promotes diversity within the bank. These are not just words. This is we’re putting our money where our mouth is and taking on initiatives. We think if we can do our bit and move things in the right direction by an inch, and everyone does that, it will make a big difference in society, so we’re very excited about this. Our employees are very excited about this, and more to come on this in the future. Let me turn this over to Tom and he’s going to walk you through a little more on the business side before Leslie gets into the numbers. Tom?

Thanks, Raj. Let me start with deposits and give a little more detail on the deposit book. As Raj mentioned, total deposits grew by $899 million for the quarter and non-interest DDA grew by $219 million for the quarter, so the deposit mix continues to improve. We allowed higher-cost deposits to run off this quarter, which we’ve continued to do for the last few quarters, as time deposits declined by $1.1 billion for the quarter. A little more detail on cost of funds. The total cost of funds, cost of deposits, declined to 43 basis points this quarter. On a spot basis, the APY on total deposits was 36 basis points at December 31, down from a spot of 49 basis points at September 30, and compared to last year at December 31 it was 142 basis points, so there has been big continued progress there. The spot rate on interest-bearing deposits was 48 basis points as of December 31 compared with 65 basis points at September 30 and 171 basis points a year ago, so we’re seeing reductions in cost of deposits across all lines of business and across all products. That continues to be a very broad-based trend. As of December 31, 2020, we had $1 billion of CDs in the book at an average rate of 1.61% that had not yet re-priced since the last Fed cut in March of 2020, so in the first quarter of this year we have a significant amount of that, just under $800 million, that will re-price in this quarter. Additionally, some CDs that matured and re-priced early in the cycle will also re-price down again at their next maturity date, so there’s a very significant difference between what these will re-price at. Our current rates are running about 25 basis points. We continue to see good, healthy pipelines and opportunities for core deposit growth across all business lines. It’s always a little more difficult to size deposit pipelines and time treasury management relationships coming on board, but we continue to expect growth in non-interest DDA at the levels that we’re seeing now. We expect to see more time deposits run off while the mix of the overall book will continue to improve. We are seeing some of the maturing CDs move into money market categories as well, but obviously at significantly lower rates. Switching to the loan side, as Raj mentioned, in aggregate total loans grew by $87 million in the fourth quarter and operating leases declined by $13 million. A little more detail on some of the segments: the residential portfolio grew by $408 million in the fourth quarter. Of that, $330 million was in the Ginnie Mae EBO segment. Mortgage warehouse continued to perform well. Total commitments grew by $90.5 million for the quarter, and we ended the year at a little over $2.1 billion in mortgage warehouse commitments, so the entire quarter and year was obviously very strong in the mortgage warehousing area. In the aggregate, commercial real estate loans declined by $89 million for the quarter. Multi-family declined by $171 million, of which $151 million was in the New York market. Beyond that, we had overall expansion in other segments of the real estate business. If you look at loans and operating leases in aggregate at BFG, including both franchise and equipment, we were down this year, down for the quarter by $124 million. Given the COVID impact on the BFG portfolio in particular, especially the franchise, we’ve been focusing our efforts over the last couple of quarters really on portfolio management and exposure reduction versus new production. If we look into 2021 a bit and break down what we see happening in the different business lines, we expect to see continued strong growth in the Ginnie Mae EBO and mortgage warehousing businesses. We expect to see the C&I business start to return to a more normalized growth mode as the economy picks up and the vaccines and so forth are distributed. We’re seeing that as high single-digit growth for 2021, predominantly in the back half of the year. We’re forecasting a low-single digit decline in CRE for 2021. We continue to have some concerns about valuations in certain segments of the portfolio. Clearly the hotel and retail segments will be challenged for a good portion of this year. Small business lending is an area we expect to see good growth in 2021. We’ve invested a lot of our technology and time in expanding the small business area. In the franchise area, we expect to see that continue to run off probably in the 20% range in 2021 as we continue to work through that. Pinnacle is expected to decline slightly mid-single digits, but that may turn around if there are changes in corporate tax rates or the competitive landscape from an interest perspective. Switching a bit to an update on PPP, the overall PPP process is going well. We’re in the forgiveness stage on the 3,500 loans that we originally made in round one of PPP. That’s going very smoothly. We probably have about 700 loans so far that have been forgiven, and we expect that to continue in the first quarter of 2021. We’re participating in the second draw program for eligible businesses who were given first draw PPP loans. That recently opened and will be open for clients in that phase. We’re expecting maybe a 50% to 60% second draw request rate from clients that we had in the first draw. Overall, PPP is going well. Some additional comments around loans for which we granted deferrals, and I’d refer you to Slide 16 in the supplemental deck for more detail. Starting commercial, only $63 million of commercial loans were still under short-term deferral at December 31. $575 million of commercial loans had been modified under the CARES Act, so taken together this was $638 million or approximately 4% of the total commercial portfolio as of December 31. Not unexpectedly, the portfolio segment most impacted has been the CRE hotel segment, where $343 million or 55% of the segment has been modified as of December 31. I would remind you that the majority of our hotel exposure is in Florida, the majority is in leisure properties, and so those are the segments that we’re expecting to see rebound a bit more, and over the last few months we’ve seen occupancy tick up to much better levels than we had seen a few months earlier. We see in that segment more travel and leisure coming up, and we also see some surveys that we’ve read recently about companies returning more to the business travel segment as well. Our hotel book isn’t really a business travel segment, but overall we see the travel markets improving as we get deeper into 2021. On the franchise side, 8% or $46 million of the franchise portfolio was on short-term deferral or had been modified as of December 31, compared to $76 million or 12% that were on short-term deferrals as of September 30 and 74% that were granted initial 90-day payment deferrals. $48 million or 67% of our cruise line exposure has been modified under the CARES Act as of December 31. Almost 80% of the total commercial deferrals and modifications and almost 60% of the total loans risk-rated substandard or doubtful are from portfolio segments that we had initially identified as needing heightened monitoring due to potential impacts from the pandemic, so it continues to be those same segments that we’re seeing all of this activity, and we don’t at this point see any level of difficulties coming from other segments than the ones we had initially identified. On the residential side, excluding the Ginnie Mae early buy-out portfolio, $144 million of loans were on short-term deferral. An additional $12 million had been modified under a longer-term CARES Act repayment plan at December 31. This totaled about 2% of the residential portfolio. Of the $525 million in residential loans that were granted an initial payment deferral, $144 million or 27% are still on deferral while $381 million or 73% of those loans have now rolled off. Of those that have rolled off, $362 million or 95% are now making regular payments, while only 5% or $19 million have not resumed a regular payment program. Just as a reminder, when we refer to loans modified under the CARES Act, we’re referring to loans that have been excluded from modifications other than short-term deferrals, and these are loans that if not for the CARES Act would likely have been classified as TDRs. As Raj said, most of these have taken the form of nine- to 12-month interest-only deferrals. Within the CRE portfolio, we’re still seeing overall good rent collections in the office market. Depending on the geography, we’re seeing about 90% in the New York market and 97% in Florida, so we think the office collection rate is still running very well. Multi-family collections are running about 90% in New York and about 96% in Florida, and for our larger retail loans we’re seeing low 90% rates in the retail space. A bit more on hotel occupancy in the hospitality segment. All of our properties in Florida are now open and two of the three properties that we have in New York are open. In Florida, we’re continuing to see improvement in occupancy. We saw about a 46% average occupancy rate for the quarter. December is obviously a stronger travel month in Florida, and we’re coming into the better part of the season. In December, we saw occupancy rates in some areas as high as the 60% range, but generally we saw upper 40s to low 50s, so the hotel segment is gradually showing some improvement. A little more detail about what we’re seeing in the franchise space and in the fitness space. As we’ve said before, when we look at concepts where there is significant drive-through and delivery capability, those tend to be doing well, things like pizza, chicken, and other more popular QSR concepts are doing very well. Many are now posting double-digit same-store sales increases. Dining concepts are obviously still struggling a bit, and that’s where we see some softness. Certain segments are a little divided depending on whether those concepts in certain locations have delivery-type economic models, or whether they’re in malls or similar locations. Those are a bit up and down, but overall we’re seeing improvement within the franchise area. Fitness has taken some steps forward since our last call. At this point, all of our stores are open with the exception of those that are in California, particularly around the Los Angeles area, so basically 90% of our stores are open at this point. They’re not all operating at 100% levels, but this is the highest rate of openings that we have seen since the pandemic started. With the exception of just California, at this point there are 280 stores, and 90% of them are open, so that gives you a good sense of what we’re seeing in the restaurant and fitness areas. Now I’m going to turn it over to Leslie for a little more detail on the quarter.

Thanks Tom. I’ll start with everybody’s favorite subject, CECL and the reserve. Overall, the provision for credit losses for the quarter was a net credit or recovery of $1.6 million compared to a provision of $29.2 million last quarter. That $1.6 million consisted of a $1.2 million provision related to funded loans and a recovery of $2.9 million related to unfunded commitments. The reserve, the ACL, declined from 1.15 to 1.08, 1.08% of loans this quarter primarily because of charge-offs, which is exactly what we would expect to happen under CECL; as charge-offs are taken, the reserve would come down. Slides 9 through 11 in the supplemental deck provide some details on changes in the reserve and the composition of the provision and the allowance. Charge-offs totaled $18.8 million for the quarter, which reduced the reserve; $13.8 million of this related to the write-down to market of some loans that we sold during the quarter or that were moved to held for sale right at quarter end, and those were sold in January. $34.1 million, and all of the rest of this is stuff that ran through the provision, the $34.1 million decrease in the reserve and provision related to the improvement in the economic forecast. Offsetting that was a $32.8 million increase related to increases in some specific reserves and net risk rating migration. We had an $11.4 million reduction in the amount of qualitative overlay. This is exactly what we would expect. We expect that qualitative overlay to come down as more facts are known about individual borrowers and more of that gets captured in the quantitative modeling. We also had an increase of $15.2 million related to more conservative modeling assumptions that we’ve made around behavior of certain residential borrowers that had been on payment deferral, so all of that going in opposite directions kind of netted down to that provision of basically zero for the quarter. The decrease in the reserve percentage also reflects the fact that Ginnie Mae EBO mortgages are a larger component of total loans, and those carry basically no reserve. Some of the key economic forecast assumptions, and I’ll remind you this is a really high level look, the models are really processing literally hundreds, if not thousands, of regional and other economic data points, but our forecast is for national unemployment at about 6.7% for the first quarter of ’21, remaining stable through 2021 and then trending down to 5.4% by the end of 2022; real GDP growth reaching 4.1% in 2021 and 4.7% by the end of 2022; and S&P 500 index remaining relatively stable around 3,500 and stabilizing; Fed funds rate staying at or near zero into 2023. The franchise finance portfolio continues to carry the highest reserve level at 6.6%, followed by CRE at 1.5% and C&I at 1.1%. The reserve on the residential portfolio remained relatively stable quarter over quarter. Reductions resulting from the improved economic forecasts were offset by changes in modeling assumptions. As to risk rating migration, on Slides 23 through 26 in the deck we have some detail around this. Not surprisingly, as we continue to move through the cycle and get more detailed information about borrowers, we did see some additional downward migration this quarter, although as Raj pointed out, the pace of this has slowed considerably, as we would expect, and we hope to see some positive tailwinds as the economy continues to improve as we move through 2021, as we’re expecting it to. In terms of migration to substandard accrual, the largest categories were in CRE, and that would be in the hotel, multi-family New York and retail segments, and we downgraded some of the cruise line credits this quarter. Overall in franchise, the level of criticized and classified assets actually declined this quarter, but we did see some fitness concepts move from special mention to substandard. Non-performing loans increased by about $44 million this quarter, the largest increases being in multi-family residential as we had some loans come off of deferral and fail to resume a regular payment schedule, and a little bit in franchise finance in the fitness segment. As expected, we continue to see recovery in the fair value mark on the investment portfolio this quarter. The portfolio is now in a net unrealized gain position of $85.6 million, and we expect no credit losses related to any of the securities in that portfolio. Consistent with the guidance we provided last quarter, the NIM increased by one basis point this quarter to 2.33. The yield on earning assets declined by 12 basis points and, you know, there’s still pressure on asset yields, but this was a much lower, smaller decline than we had experienced the quarter before, so that’s good to see. Obviously this is just due to run-off of higher yielding, older assets that were put on in a higher prevailing rate environment. Cost of deposits declined by 14 basis points quarter-over-quarter, and as Tom pointed out, I’ll remind you that almost $800 million of those time deposits are scheduled to mature and price down in Q1. Non-interest expense, compensation expense was up this quarter, and there were a few notable items in there that we’ve pointed out in the press release that I’ll highlight for you. We did adjust our variable compensation accrual by $6.6 million as operating results in the back half of the year were far better than we had initially expected. I would call that a first world problem - glad to see those revenues up, allowing us to do a little more for our employees in the way of variable compensation, a $2.2 million accrual for some rollover vacation time that we made the decision to allow our employees, due to the COVID pandemic and the difficulty people have had using their vacation time, and we also had an increase in an accrual related to some RSU and PSU awards that resulted from the increase in the stock price, another first world problem. I’ll take that. That’s kind of what went on in compensation expense. A little bit of guidance looking forward to 2021. I will preface my remarks by saying this is maybe the most challenging environment in which I’ve ever had to forecast what was going to happen over the course of the coming year, so all of this guidance is predicated on a lot of assumptions about the economy, interest rates, tax rates, the competitive environment, the regulatory environment, and any of that could change. But as of now, what we see is mid single digit loan growth, more of that concentrated in the back half of the year. As Raj said, we don’t expect much in the first quarter, and that’s excluding the run-off of PPP loans, by the way - that mid single digits excluding that run-off of PPP loans. Again, mid single digit, a little bit higher than loan growth, mid single digit deposit growth, but double digit, mid-teens non-interest DDA growth as we continue to re-mix that portfolio and let those higher cost rate-sensitive customers run off and grow non-interest DDA. We expect the NIM to increase for the year and we would expect PPP forgiveness to be largely a first quarter 2021 event, so the NIM in the first quarter will get a lift from PPP forgiveness. I think there’s about $11 million worth of unrecognized fees still remaining to flow through that will come through in the first, and maybe some in the second quarter. The provision - under CECL in theory, the provision should be related only to new loan production, and charge-offs should reduce the reserve. If the world didn’t change, that’s what would happen. We have not attempted to forecast changes in the economic forecast, but if the economic forecast doesn’t change, the provision for the year should be modest and would be higher in the second half of the year as loan growth picks up. Any charge-offs taken should reduce the allowance, and we would expect net charge-offs to exceed the provision for the year and the reserve to come down. If our prognostication about the economy is true, we would expect over time if we return to an environment similar to what we were in right before, you know, at the time we adopted CECL, we would expect the reserve to return back to those levels. Non-interest income for next year, we do expect to see some increase in deposit service charge and commercial card revenue materialize in 2021, and for lease financing income to stabilize after some decline in the first quarter. Expenses overall in the aggregate, we would expect probably a mid single digit increase, and that’s going to come from two areas. One is comp - part of that is just the natural, normal merit increases and inflationary salary increases, which we think will resume, we actually hope will resume in 2021 as the economy recovers, but we do expect it to remain below 2019 levels, and we also expect technology-related costs to increase as we continue to invest in some important initiatives that Raj alluded to. Tax rate, we would expect to be around 25% excluding discrete items if there’s no change in the corporate tax rate. The one other thing that I will point out to you, we had about $3 million dividend equivalent rights outstanding that expire in the first quarter of 2021, and that will add $0.02 to $0.03 per quarter to EPS. I just wanted to make you aware of that. With that, I’ll turn it back over to Raj for closing comments.

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

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

Good morning.

Good morning.

Good morning.

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

Yes. What you see is our push to grow DDA and lower the cost of funds. What you do not see is that I am working hard to make sure we have the right clients. For almost six months, at each monthly deposit call we have discussed how to ensure that when rates rise, whenever that happens, we have lower betas and less pain than we did the last time rates went up. We look at various indicators: parked money and single-account or few-account behavior generally suggest that money will leave or be highly rate sensitive, so we are trying to de-risk and move those accounts out. We are also selecting industries that tend to have lower beta, so we are addressing this on multiple fronts. You do not really know exactly how a client or relationship will behave when rates rise. You can make educated guesses by looking at how they behaved last time, their industry, customer behavior, and how much payment activity they ran through the bank, but those are only indicators. We are working on all those fronts, not just for this quarter or year, but with a focus on 2024 when rates may rise. I am curious to see how this will play out. DDA is the obvious solution because DDA has zero beta. If I could make the entire deposit base non-interest DDA, I would, because that would be the best protection against pain in a rising rate environment.

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

I don’t think our philosophy around M&A has really changed. M&A is a tool to be used carefully; the goal shouldn’t just be to get bigger, it should be to get more profitable. Sometimes M&A makes sense, but if we can build something ourselves, we’d rather be patient and build it. That said, some things can’t be built internally, and for those situations M&A is appropriate. My philosophy remains the same, but the environment has changed. Last year there wasn’t much M&A until the fourth quarter, and as we come out of this challenging period I do expect more M&A activity, especially in the midcap space, perhaps less so among the very large banks. This year and maybe next year we’ll be active on the M&A front. We’re willing to talk to anyone and everyone about any deal that makes sense, although we don’t lead with that.

Got it, and on buybacks?

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

Got it. Thank you for taking my questions.

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

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

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

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

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

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

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

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

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

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

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

Great, thank you.

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

Yes, it’s Brady. Good morning guys.

Morning Brady.

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

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

Yes, absolutely.

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

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

That’s correct, Brady.

Okay.

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

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

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

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

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

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

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

Got it, thanks guys.

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

Thanks, good morning everyone.

Good morning.

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

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

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

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

Got it, great. Thank you. I was also hoping to get some insight on the multi-family marketplace, particularly in New York. Obviously you continue to see run-down in that portfolio. I’m just curious: what is triggering borrowers to leave the bank? Is it that they’re reaching the end of their term and looking to take advantage of the lower rate environment? If so, among those who are walking away, do they have healthy debt service coverage ratios and are you simply allowing them to walk away for strategic reasons? Any color around that would be helpful.

Yes. We began a couple of years ago with a strategy to reduce our exposure in the New York multi-family market, and 2021 represents the final five-year term of the original vintage loans we placed. The clients who are leaving are largely relationships we do not wish to maintain because changes in rent regulation and the New York economy have weakened overall market health. Rising cap rates are pressuring valuations, and some of the properties we are exiting have very thin debt service levels. This is a healthy rebalancing of our portfolio, and multi-family will continue to run down in 2021 as the last of the 2015 production comes to maturity.

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

That’s a difficult question. Each business that applies will be a little different, so it’s hard to generalize because we haven’t processed the first new application yet. It’s difficult to forecast what that demand will look like and what the retention of those dollars will be. Given the requirements around the program, which primarily include a 25% drop in revenue, I would expect, not just for us but for every bank, a higher percentage of borrowers will have experienced more distressed periods. The liquidity build-up that happened in phase one, where borrowers who did not need a substantial portion of the liquidity held it for longer, likely won’t qualify for phase two. I think the dynamics of deposit funding and deposit retention under phase two will be fairly different than phase one, but we haven’t seen any applications yet, so it’s hard to say.

It’s a great question.

We're seeing them now. We will execute and open the program this week, but we haven't seen enough of the details to be able to forecast what that might look like.

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

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

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

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

Yes, I guess it’s not changed much.

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

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

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

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

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

Okay, and then just one last thing about expenses. I wanted to confirm the expense guidance: is that based on the $123 million of expenses this quarter, or is it based on some sort of baseline that excludes the recent jumps in salaries, variable compensation, and so forth?

No, it's based on the annual expense number, Stephen, all in. I know there are a lot of moving parts in there, but that's what that guidance is based on.

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

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

Thank you. Hey, good morning.

Morning Dave.

Following up on Brady's or Stephen's or whoever was before me, his question: just to clarify and make sure I heard it right, the increase in that substandard accruing multi-family, if I heard correctly, is centered within that portfolio, in the retail mixed-use or the multi-family in and around Washington Square Park and NYU in New York City? Is that the case?

Correct.

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

I think where that comes from is as our credit folks look at the residential portfolio and the population of loans that are or were on deferral, they felt we should model those a little more conservatively this quarter until the loans rolling off deferral establish a longer trajectory of regular payment history. My hope is that six months from now that gets reversed, but we’ll see. That was just a conservative assumption we made because we still feel there’s some uncertainty as to whether all these residential borrowers rolling off deferral will truly establish a consistent history of making their scheduled payments. We were just a little more conservative in how we modeled those loans this quarter.

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

No, and it’s not that we’re seeing a lot of that; it’s just that many of these borrowers have not established or re-established a payment history, so we wanted to be a little more conservative until they do.

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

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

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

Got it, thank you.

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

Hey, good morning everyone.

Good morning Brody.

I just wanted to, sorry to beat a dead horse, Leslie, but on expenses—taking your earlier comments about variable compensation and the guidance on merit-based increases for the first quarter, it sounds like variable comp may come down a bit in Q1 while you will also have merit-based increases. So, all in, when I think about the salaries and benefits line item, should that stay relatively flat compared with the fourth quarter after factoring those two items?

It will be higher, Brody, because of other elements that always hit in the first quarter, such as payroll taxes, HSA accounts, and front-loaded 401(k) contributions. It will then come down quarterly after that. It’s in spite of the merit increases. The first quarter comp is always higher because of those front-loaded tax and benefit costs.

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

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

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

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

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

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

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

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

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

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

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

Agree.

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

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

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

Absolutely.

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

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

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