BankUnited, Inc. Q1 FY2021 Earnings Call

Thank you for joining us today for the BankUnited Inc. First Quarter Earnings Conference Call. All participants are currently in listen-only mode. Following the presentations, there will be a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to your speaker today, Susan Greenfield, Corporate Secretary. You may begin.

Thank you, Tuwanda. Good morning, and thank you for joining us today on our first quarter results conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that 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 or on the Company's current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations contemplated by the Company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including, without 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, 2020, 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. Thank you for joining us for our quarterly earnings. Let me talk a little bit about the environment before we talk about the results for the quarter. We talked to you about 90 days ago, so I'll try and draw comparisons to what I said 90 days back. I had an optimistic tone 90 days ago, I am more optimistic today. What we are seeing – the data that is coming to us from every angle, whether it's around the vaccination and the pandemic or its economic data across the Board, we are seeing more reasons to be optimistic for the remainder of this year and into next year than we were in January, and January looked fairly optimistic to begin with. So the economy is opening up. Florida is clearly a much further along than other parts of the country. New York is a little further behind than other parts of the country, but overall our franchise where we do business, we are seeing a lot of positive momentum. And then that – those assumptions that get reflected in our financials, which we will talk to you in some detail, but generally, feeling very good about economic activity and about the economy opening up and the vaccine rollout. Within the company also, I will say that we are trying to gather data on how many employees have been vaccinated, it's a self-reported data, so it lags a little bit. But we are kind of matching up with where the country is, about 30% of our employees are either vaccinated or about to be fully vaccinated and many more are in line. Most of the senior management team is now fully vaccinated. The quarterly performance, we reported net income of about $99 million, $98.8 million to be exact, $1.06 per share. This compares to $0.89 that we reported to you last quarter. And obviously, this time last year, the first quarter was a loss of $0.33. So we are going to come a long way in a short few months. The highlights of the quarter is – again, we will go through a little bit about the P&L, I will jump to the balance sheet after that. Net interest income continued to grow despite elevated levels of liquidity is a problem across the industry. We had NII of $196 million. This compares to $193 million last quarter and $181 million compared to the first quarter of last year. As we told you three months ago, we were positively biased when it came to NIM guidance, and NIM did expand from 2.33% last quarter to 2.39% this quarter. And that expansion really is a result of us executing on our deposit strategy. Deposits continued to grow and cost of deposits continued to come down. We had another very, very solid quarter. Non-interest DDA grew by $957 million, which I am very happy about. The average non-interest DDA grew by $338 million. But the number that really makes me happy is that non-interest DDA now stands at about 29% of our total deposits. Just in December, we were at 25%. At the end of 2019, I think we were at 18%. And when we started this deposit-centric strategy about three years ago, we were in the mid-teens. I think we were 14% or 15%. So we've come a long way and I'm very, very proud of what the company has achieved. Cost of deposits also declined by 10 basis points. So last quarter we were at 43 basis points, we were down to 33 basis points for this quarter, and I'm very confident that in second quarter, we will again show a fairly decent decline. And the reason I can say that is because on March 31, on a spot basis, we were already down to 27 basis points. So we are starting second quarter at 27 basis points. So the number is going to be somewhere in the mid-20s. And the guidance that we give that we will drop our cost of funds, our cost of deposits into the teens by the end of the year stance. So overall, feeling very good about what we've been able to achieve on the deposit side. And the deposit growth was fairly widespread and came from every part of the bank. On credit – let me talk a little bit about loans. Loans were down about $500 million. Most of that decline was the continued drop in utilization rates on unwinds. So I think $425 million off that $505 million was directly attributable to less utilization. This has been a negative surprise for us. We had made assumptions when we did the plan at the beginning of the year that the line utilization will start to normalize slowly month-by-month, but instead we saw further declines. In January, we saw another decline, further in February. It's only in March where we've seen a slight uptick. One month doesn't make a trend, but it's a positive number and we are happy to see that, and hopefully, we will see this stabilize from here on and start to get back to normal. So Tom will talk to you more about that, but that was what was the biggest driver. In terms of credit, let me go over a few things. Temporary deferrals and modified loans under CARES Act – modification under the CARES Act that total number remain stable at about 3% of the portfolio. NPL ratio declined, and it was 71 basis points last quarter, it's down to 67 basis points. But if you actually exclude the guaranteed portion of SBA loans, it was 53 basis points. Charge-offs declined compared to all of last year. I think last year we were running at about 26 basis points net charge-off rate. We are down to 17 basis points for this quarter. And for the first time since this pandemic hit us, our criticized and classified assets also started to decline. And as we see more good economic data come through, more importantly, as we start to see cash flow data come through, I expect this number to start declining a little more rapidly into the second and third quarter. So overall, feeling pretty good. Capital, by the way, needless to say, we are in a very strong capital position. CET1 ratio is at 13.2% for holdco and 14.8% for the bank. We did buy back some stock. We bought back about $7.3 million of stock this quarter. We still have a little less than $40 million left in the buyback and we plan to execute it against that buyback opportunistically. It's a pretty volatile time in the stock market, so we want to use that volatility to our advantage and buyback when we see dips into stock. We did declare a $0.23 dividend and currently, we are anticipating maintaining that level. Our book value per share is now at $32.83, tangible book value is at $32 even both are above the pre-pandemic levels. So strategy stays the same, continuing to add one quarter relationship at a time, continuing to focus on non-interest DDA. I'll give you an example, something that just crossed my screen late last night. We've been looking for this – we've been calling it for a long time, and we are finally able to pry it away from one of the biggest banks in the country. It's a firm – mid-market firm based in Broward. The relationship is coming over. I won't say from which bank, but it comes with a $0.5 million loan and $26 million in deposits with a full suite of treasury management products and a longstanding company, very successful in the community and very happy to be a client of BankUnited. So I see a deal or two like this every other day, and that's really drip by drip is what really adds to the franchise value and we are focused on that. We also keep identifying niche markets and segments where we can grow. We are now shifting focus. We haven't hired many, many producers over the course of last year through the pandemic, but we are now focused on bringing on more producers and are in discussions with a number of producers in different geographies. Very importantly, we will continue to invest in technology and innovation. This actually – I do want to say, this quarter marks the culmination of our two-year journey, the cloud journey as we call it. We are now officially out of the data center business. We are a fully cloud-enabled bank. Took two years to put everything in the cloud, and we partnered with Amazon, they've been great partners. And in terms of our capabilities, our infrastructure and the capabilities that cloud provides us, we are in a very different place than we were two years ago when we started down this path. Also, I want to announce that part of this was also the first cloud-native application that we developed, also a very big deal for BankUnited because we never really had any developers. We never developed anything in terms of products for delivering our deposit solutions. But two years ago, we decided that mobile banking is such a core function that we cannot just outsource it to the same vendor, which every other bank our size goes to, that we needed to control this and needed to actually have this in-house. We put a lot of effort into developing it. It was developed, like I said, in the cloud and we launched this just last weekend and converted our entire customer base with no issues at all, and I'm very excited about this big investment that we made. Also, let me talk a little bit about 2.0, and specifically, 2.0 revenue initiatives. As you know, they have been delayed given the pandemic, but I'm happy to report that we are actually making progress and getting a lot of traction, and all the various things that added up to that, that revenue target, whether it's a commercial card program, whether it’s treasury management space. And you'll start to see some of that – you already are seeing some of that in our P&L. Deposit service charges and fees this quarter were up 17% compared to the first quarter of last year. A lot of that is coming from the 2.0 initiatives that we've put in place and more to come. Also, the small business initiatives that were also part of 2.0 are now going to pick momentum. Small business, as you can imagine were distracted very much with PPP 1.0, and then PPP 2.0. As the PPP and everything related to that gets behind us, we are going to start focusing on that and start delivering on those initiatives as well. So overall, feeling pretty good. I think it was a pretty solid quarter. Tom and Leslie are going to walk you in a little more detail about the businesses and also the financials. Tom, why don't you go next?

Sure. Thanks, Raj. So let's talk a little bit about the deposit side first, and obviously, another excellent, excellent quarter for us in NIDDA growth and is right said. I think what's – when we look back at this quarter, what's most satisfying is we are kind of building this wall brick-by-brick. And when we look at the results that you see in NIDDA, I think the thing that's most gratifying is how broadly it's based across our business lines, and also just the number of new relationships that are contributing to this growth, which is where we are seeing. The majority of the growth is just coming off of what we would call new logos for the quarter or across all business lines and kind of sweet spot type relationships for us that none are particularly jumbo. The one that Raj mentioned is a little bit larger, but just a broad number of small business, middle-market commercial relationships is really adding to this NIDDA growth. So average non-interest bearing deposits grew by $338 million for the quarter and by $3.1 billion compared to the first quarter of 2020. On a period-end basis, non-interest DDA grew by $957 million for the quarter, while total deposits grew by $236 million. So we continued to allow more price sensitive and broker deposits to run off as we've grown the NIDDA base, so significantly time deposits for the quarter declined by $1 billion. So if you look at total cost of deposits, as Raj mentioned, declined to 33 basis points for the quarter, 27 basis points on a spot basis, down from 36 basis points as of December 31, 2020 and reductions and cost of deposits continue to be broad-based across all product types and all lines of business. We continue to forecast good growth in NIDDA, a good continuation of the momentum that we've had. Every quarter may not be as strong as this one, but we expect that each quarter to be very good. And we also expect overall cost of deposits to continue to decline. As Raj mentioned, on the loan side, we were down $505 million. Q1 is not typically a strong quarter for us. We did have $234 million of growth in the residential portfolio with the EBO, Ginnie Mae portion contributing $341 million. As Raj noted, the majority of our decline for the quarter was really attributed to line utilization, which is kind of hitting historic lows. But we anticipate that will pick up as we start to see the year unfold, the economy improve, people start to use more inventory purchases and other things happening within the portfolio. One interesting side note, we looked at our numbers for the quarter and we had a more historic level of line utilization. Our commercial loans, our C&I loans would have actually been up. It would have contributed another $800 million of base into the C&I portfolio, so it gives you some kind of a dynamic for what the line utilization numbers look for us. As we look forward, in the year, we are seeing good growth in pipelines in Q2. As Raj noted, obviously increased economic activity among our clients, so we are anticipating. As the year develops that we will see growth in our residential teams, our small business lending, our commercial banking teams, core middle-market teams, mortgage warehouse lending. So we expect the remainder of the year to develop more strongly than we saw in the first quarter. Just an update on PPP loans. We booked $265 million worth of PPP loans during the first quarter under the Second Draw Program and numbers of units, it's about a third of what we did in the First Draw Program. At this point, we are not accepting any more second draw PPP loans. On the forgiveness front, we forgave $138 million in loans during – that were made during the First Draw Program. We have about $650 million remaining outstanding under the First Draw Program as of March 31. Switching gears a little bit, some additional details around deferrals and CARES Act modifications. The levels of loans on deferral or modified basis remain relatively consistent with prior quarter. In commercial, only $35 million of commercial loans were still on short-term deferral as of March 31, $621 million of commercial loans have been modified under the CARES Act. Together, these are – $656 million or approximately 4% of the total commercial portfolio, which is pretty consistent with the levels as the end of the last quarter. Not unexpectedly, the portfolio segment most impacted has been the CRE hotel book, where $343 million or 55% of the segment has been modified also consistent with prior quarter end. Residential, excluding the Ginnie Mae early buyout portfolio, $91 million of loans were on short-term deferral. An additional $15 million had been modified under a longer-term CARES Act repayment plan as of March 31. This totaled about 2% of the residential portfolio. Of the $525 million in residential loans that were granted an initial payment deferral, $91 million or 17% are still on deferral, while $434 million or 83% have rolled off. Of those that have rolled off, 94% have either paid off are making the regular payments at this time. As it relates to the CRE portfolio, I want to spend a little bit of time as we normally do going into some of the occupancy collection rates and some key data’s on some of the more impacted segments of the portfolio. So an average rent collection rates for the quarter. We continue to see good strength in the office market. We saw collection rates at 96%, which were even for both Florida and New York. Multifamily loans were at 90% collection rate in New York and 92% collection rate in Florida, and retail has continued to improve and perform pretty well at 85% in New York and 99% in Florida. I think the big news on the hotel front is we are seeing a lot more strength in the hotel market. All of our properties in Florida are open and have been for a considerable period of time. Two of the three properties that we have in New York are open with the third expected to reopen in June. Occupancy for the two hotels that are open in New York ran about 80% for March. And in Florida, occupancy rates for the entire portfolio, which is a little under 30 hotels in total averaged 80% in March with some reporting occupancy rates in the 90% range. For those that have tried to find a hotel in Florida recently, it's not so easy to find any place that's now open in Florida. So we have seen this improved from 46% last quarter, 56% in January and February, we are stronger and March was up to the 80% level. And we are seeing forward forecast from most operators that continue to show strength as we get – as we start to head towards the summer months. From a franchise perspective, in the QSR portfolio, we are seeing the majority of our concepts are open, reporting strong same-store sales, particularly those with good drive-through delivery pick-up models. We still have a couple of concepts that are predominantly indoor dining that are challenged, but I'd say on a broad basis, the QSR portfolio is performing much better. Staffing is a challenge in this market. A lot of our QSR operators are reporting difficulty in bringing in staffing right now with stimulus payments and whatnot flowing through the economy, so the labor market is a bit of a challenge. But overall, revenue is strengthening in this segment. In the Fitness segment, Planet Fitness, we have two concepts. As you know, Planet Fitness, 100% of the stores are now open. The payment systems turned on. Retention is averaging 90% in that concept, and we now have all of our Orange Theory franchises open. There's been some decline in membership, but operators are still expecting a full recovery. Some of them are still operating at lower capacity levels due to social distancing, but we are seeing a sizeable pickup in the Orange Theory franchises as well. So we are feeling much better about the QSR and franchise portfolio that we felt last quarter or the quarter before, so seeing a lot of strength there. So with that, Leslie will get into a little bit more detail about the quarter now. So Leslie?

Thanks, Tom. So as Raj mentioned, net interest income grew this quarter up about 1.5% from the prior quarter and up 9% from the first quarter of the prior year. The NIM increased to 2.39% this quarter from 2.33% last quarter in spite of elevated levels of liquidity on the balance sheet. So we were pleased to see that. The yield on loans increased to 3.58% this quarter from 3.55% last quarter. The recognition of fees on PPP loans that were forgiven added about 6 basis points to that yield this quarter compared to 3 basis points last quarter. So as we pull that out, pretty flat quarter-to-quarter for the yield on loans. There is still $15.2 million of deferred PPP fees left to be recognized and $6.3 million of that relates to the First Draw Program. The yield on securities declined by 9 basis points to 1.73% for the quarter. Spreads remain really tight in the bond market, as I'm sure all of you know, and we continue to experience an accelerated level of prepayments on some of the higher yielding mortgage-backed securities. So those yields do remain under pressure. The total cost of deposits declined by 10 basis points quarter-over-quarter with the cost of interest-bearing deposits declining by 13 basis points. We do expect that to continue to decline given that the spot rate was 27 basis points at quarter end, it's going to be at least somewhat lower than that, so we will see an additional decline this quarter, although maybe not as much as we've seen in the last two quarters. The cost of FHLB borrowing did increase to 2.32% as the borrowings that were paid down were short-term lower rate advances compared to the hedged advances that remain on the balance sheet. In the aggregate, there's about $1.6 billion of hedged advances that are scheduled to mature over the remainder of 2021 with a weighted average rate in excess of 2%. And we continue to evaluate the economics and whether it makes sense to terminate some of the longer-dated hedges that are out there. We do expect the NIM to continue to increase. We expect that to grow next quarter. It will be helped by PPP forgiveness, but even excluding that, we expect the NIM to continue to go up. Shifting gears a little bit to talk about CECL and the reserve. Overall, the provision for credit losses for the quarter was a recovery of $28 million compared to a recovery of $1.6 million last quarter, and obviously a provision of $125 million in the first quarter of 2020, which was the quarter where we really looked at our big provision related to the onset of COVID. The negative provision this quarter primarily resulted from an improving economic forecast. And within the forecast, the improvement in outlook for unemployment was the biggest driver of the reserve release. The reserve declined from 1.08% to 0.95% of loans, and Slides 9 through 11 of our deck give some further details on the allowance. Major drivers of change, the reserve went down $36 million related to the economic forecast, again, primarily the change in unemployment. A decrease of $10.1 million due to charge-offs most of which related to one BFG franchise loan that was having trouble even prior to COVID. A decrease of $12.8 million due to changes in the portfolio mix and the net decline in the balance of loans outstanding, $6.1 million increase in qualitative reserves, $9.6 million increase related to updates of certain assumptions, primarily updated pre-payment fees, an increase of $6.8 million related to loans that were further downgraded to the substandard accruing category. So those are the major components of the move in the reserve for the quarter. I do want to point out that the reduction in the reserve for the quarter was primarily related to the pass rated portion of the portfolio. The reserve for pass rated loans declined from $137 million to $93 million, while the reserve for non-pass loans increased from $120 million to $128 million. So as we move forward, our expectation would be if economic trajectory plays out as we think it's going to, we would expect to see some upward risk rating migration and that would in turn results in some further reductions in the reserve. Some of the key economic forecast assumptions that drove the reserve, and I'll remind you that it's really a lot more complicated than this. This is a very high-level look at some of the data points that are in the economic forecast. National unemployment declining to 5% by the end of 2021 and trending down to just over 4% by the end of 2022, real GDP growth of just over 7% by the end of 2021 and 2.3% for 2022, the S&P 500 index remaining relatively stable at around 3,700, and Fed funds rate staying at or near zero into 2023. A little bit of detail on risk rating migration. And you can see a breakdown of all of this on Slides 23 through 26 in the deck. Total criticized and classified assets declined by about $75 million this quarter, but we did see some migration into the substandard accruing category from special mention. We do, again, expect to see some positive tailwinds here if the economy continues to improve as we expect it to as we move through 2021. In terms of the migration to substandard accrual, the largest categories where we saw that were at CRE, hotel, multifamily, New York and office. Non-performing loans did decline this quarter from $244 million to $234 million. Just to quickly wrap up with a look forward to the rest of 2021, to reiterate Tom's comments, we do expect non-interest DDA growth to continue as well as total deposit growth, but our focus remains on non-interest DDA and we are more than willing given our liquidity position to allow more rate sensitive and broker deposits to run off. FHLB advances will continue to decline. Securities will probably grow in the low-to-mid single digits depending on our liquidity position. The provisions always define one to try to forecast. Under CECL, the provision should and theory be related to new loan production, while charge-off should reduce the reserve. If we do see positive risk rating migration as we currently expect, we will see some further reserve release related to that. Net interest income should be up mid-single digits over 2020 as should non-interest income, excluding securities gains, which tend to be episodic and we don't make any attempt to predict those. And then with respect to expenses, I would say the guidance we gave in January has not changed. And with that, I will turn it over to Raj for closing comments.

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

That’s normal.

That's normal spring break. But let's turn this over and take some questions.

Thank you. Our first question comes from Dave Rochester with Compass Point. Your line is open.

Hey. Good morning, guys.

Good morning.

Good morning, Dave.

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

Yes. So that's exactly the question I asked Tom yesterday. I think the pipeline is that three months into this quarter versus three months into last quarter. I think his answer was roughly 2.5x.

Yes.

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

Okay. It sounds good.

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

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

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

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

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

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

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

Yes. Yes, it does. Yes.

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

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

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

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

Hey. Good morning, guys.

Good morning, Ben.

Good morning.

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

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

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

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

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

I'm not sure forgiveness is really having much of any impact on the deposit picture. At least – I don't think that's a big driver of what's going on with deposits. I think we remain quite optimistic about non-interest DDA growth and that's really a function of – Raj gave you a couple of anecdotal examples of the kinds of clients that we're onboarding and the strategy in that regard. So I think given that we're very positive about continued non-interest DDA growth. And in terms of overall deposit levels in the system, I mean, unless the Fed does something very active to pull liquidity out of the system, this cash has got to stay in the system. It may move around from the balance sheet of one bank to the balance sheet of another and back again. But I think we continue to be optimistic about non-interest DDA growth going forward. Is every quarter going to be $1 billion? Well, no. But…

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

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

Got it. Yes, that's really helpful. Thank you, guys. Great start to the year, and I'll step back in queue.

Thank you. Our next question comes from the line of Ebrahim Poonawala with Bank of America. Your line is open.

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

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

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

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

Got it. Makes sense. Thank you.

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

Hey, good morning.

Hey, Jared.

Hey. Maybe just circling back to the BKU 2.0 and how that was delayed early with CECL, I mean, sorry with COVID. As you reengage on that, what should we be looking for in terms of fees? And then maybe on the expense side, does that switch to bring the mobile platform in-house. Is that serving cooperated under that BKU 2.0? And is there any expense savings as a result of that?

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

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

Okay. So on that $20 million of remaining revenue over the next five quarters or so, we should think that that gets – we leg into that over that period of time?

Yes.

That's fair.

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

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

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

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

Now this is mostly in our existing geography.

Okay. Thanks.

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

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

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