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Operator: Good day and thank you for standing by. Welcome to BankUnited First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference is being recorded. I will now hand the conference over to your speaker host, Susan Greenfield, Corporate Secretary. Please go ahead.

Susan Greenfield: Thank you, Lydia. Good morning and thank you for joining us today on our first quarter 2024 results conference call. On the call this morning are Raj Singh, our Chairman, President, and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I’d like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company’s current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries around the company’s current plans, estimates, and expectations.

The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including without limitations, those relating to the company’s operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company’s direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise.

A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company’s annual report on Form 10-K for the year ended December 31, 2023, 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.

Raj Singh: Thank you, Susan. Welcome, everyone. Thanks for joining us. We’ll jump quickly into the numbers. We announced this morning an EPS $0.64 per share, net income of $48 million. I checked day before yesterday, I think, our consensus was at $0.60, so pretty happy about where we came out. These numbers do include — there’s not much noise in the numbers this quarter. There’s only one item to point out, which is the $5.2 million on additional FDIC special assessment. Other than that, it’s a pretty clean set of numbers. The highlights for this quarter are, deposits grew very nicely again, and not just the number, we grew non-brokered deposits by $644 million. But a large part of that growth was DDA, $404 million of it was DDA.

So our DDA to total deposits now is back up to 27%. As we have done in the previous quarters, we continue to pay down wholesale funding, which is down $1.4 billion this quarter. So, if I had looked back the last 12 months since March of last year, our total deposits have grown by $1.3 billion and we paid down FHLB advances by $3.6 billion. In fact, I think FHLB advances are now at their lowest level, not just in the last year, but in the last, like, two years since it’s going back all the way to first quarter of ’22. So we’re very happy about how much we’ve improved the balance sheet and the funding mix. Cost of deposits was up 22 basis points, excuse me. The average cost of deposits for the quarter came in at 3.18%, but the more — most important thing to note over here is that we think looking back at the last three, three and a half months, is that we have now flattened out on the cost of deposits.

The cost of deposits at the beginning of the quarter or during the quarter or at the end of the quarter was all pretty much the same number. So we had a pretty big CD cliff that occurred this quarter. And despite that, achieving that inflection point of cost of deposits is actually a pretty important thing to point out. And even into this quarter, it’s only been a couple of weeks, but it looks like we have achieved that stability, which obviously means it’s good news for margin. We thought this would happen in the second quarter, but it happened a little bit earlier, we’re happy about that. As we continue to reposition the balance sheet on the left side, residential loans, like they have been declining, declined again by $152 million, and we want to keep continuing on that trend for the rest of this year.

And commercial loan growth, this is always our slowest growth in terms of production. Production did come in exactly where we had projected, but we did have some payoffs that were a little bit unexpected and some line utilization that dropped. For that reason, loan growth was negative. The margin for the quarter came out at 2.57%. I think last quarter we were at 2.60%. We had told you that margin will be somewhat stable, maybe down a couple of basis points. It came in pretty much where we thought it would. Credit looks good. Non-performing assets are down. Non-performing loans are down. Charge-offs are down to almost nothing. This quarter, charge-offs came in at 2 basis points. I think, last year, annualized was at 9 basis points. NPAs are $119 million.

They’re down from $131 million last quarter. So excluding SBA-guaranteed loans, NPA ratio is down to just 23 basis points. That’s a couple of basis points improvement from December. Capital is strong. Liquidity is strong. Book value, tangible book value, all built up, so pretty happy about how the quarter shaped up. And also — and Tom will talk more about this, but the pipelines are pretty decent, both on the loan side and especially on the deposit and DDA side. So in terms of guidance, when you put these plans together, which is late in the year, as to what will happen over the course of next 12 months, you put those together, we give you guidance in January, and very often coming up with this guidance is not easy, especially in a volatile environment.

And often numbers can go off here and there fairly quickly, but this time around, I would have to say that so far, we’re tracking so close to what we thought we would do that I’m very happy. So, in terms of guidance, no changes. Whatever we told you in January stays. Margin will grow over the course of next three quarters. Deposits should grow. Loans, not resi, resi will keep declining. So all the guidance we’ve given you stays, no change in it. And what else here? Let me turn it over to Tom, and he can get a little more into the details on the numbers before Leslie.

Tom Cornish: Okay, great. Thanks, Raj. So, first, we’ll start off on deposits. As Raj mentioned, total deposits grew by $489 million for the quarter, non-brokered grew by $644 million, and NIDDA grew by $404 million. So obviously, we’re very excited about the NIDDA number. I mean, that’s a big number. We feel like we’ve got great momentum in growing the core operating business within the company. And what was particularly exciting about this quarter and even beyond the $404 million number is looking at, like, where it came from and how broadly based it was across all geographies and all lines of business. So, really every team contributed to this and there were no enormous numbers in terms of any one client or one piece of business that drove it dramatically.

It was kind of everywhere, which is really good to see. As Raj mentioned, the new business pipeline, from a deposit perspective on the treasury management side is really good, over $1 billion in near-term deposits, and particularly coming off of such a strong quarter, we were pleased to see that the leading indicators going into this quarter and the next quarter look really good in terms of number of deals out there, number of proposals, acceptances, things of that nature. So we felt really good about that.

Raj Singh: Tom, if I may interject, one point that I want to make about this quarter’s DDA growth was, it did happen in the third month of the quarter. So it happened more in March than in the first two months. What that means is, it didn’t really benefit our margin this quarter as much as it should benefit going forward, so just a detailed point.

Tom Cornish: On the loan side, overall loans were down $407 million quarter-over-quarter, with resi down $152 million and C&I and CRE segments down a total of $226 million. As Raj mentioned, production was actually really good for the quarter. It was in line with what expectations were. We did have, what I would say, is an unusually high number of line paydowns in certain segments, and that really ended up impacting the quarter more than we originally expected to see. As we look forward into the rest of the year, particularly in all of the core C&I segments, corporate banking, commercial banking, and small business, pipelines are really robust as we come into the second, third, and fourth quarters. So we continue to feel good about loan growth overall for the year.

Other businesses kind of performed as we expected. Franchise equipment, municipal finance were down modestly. Mortgage warehouse did have a bit of an uptick this quarter, but overall, I would say, as we look forward, the pipelines for business look very good. I’ll spend a few minutes on CRE since, obviously, we know that’s of great interest to everybody. Refer you also to Slides 12 through 15 to the supplemental deck where we provided some detailed disclosure. So overall, as we’ve talked in the past, our CRE exposure as a percentage of the total book in risk-based capital is modest. In our view, it’s 24% of total loans. CRE to total risk-based capital is 166%. Just as a comparison, if you look at the 12/31/23 call report data, for banks in the $10 billion to $100 billion range, the average is 35% for the total portfolio and total CRE to risk-based capital of 225%.

So when you kind of compare us to the core group that we would normally fit into from a peer comparison, we’re — I think, we’re below where everyone is in the market predominantly. And I’d also point out our construction loan book has always been relatively modest and is less than 10% of the total UPB within CRE. If you look at some of the data points, as of March 31, the weighted average LTV of the CRE portfolio was 57% and the weighted average debt service coverage ratio was 1.83%. About 15% of the CRE portfolio matures in the next 12 months and about 6% matures in 12 months and is fixed rate. Non-performing loans in the CRE portfolio, other than the guaranteed portion of SBA loans are negligible. So I want to turn to office for a little bit.

So we have a total office portfolio of $1.8 billion. Of that, about $300 million is medical office, so traditional office would be about $1.5 billion. It’s made up of 99 loans. I have all of them in front of me.

Leslie Lunak: How much time do you have?

Tom Cornish: And we follow each one closely by individual loan, by market segment, on a quarterly basis. So we’re very familiar with the entire portfolio. The weighted average LTV of the office portfolio was 65%. Weighted average debt service coverage ratio was 1.7% at March 31. There’s breakdowns in the supplemental deck on the office portfolio by geography that you can look at.

Raj Singh: Our largest loan is only $50 million roughly.

Tom Cornish: Right. Our average loan in the book is actually about $18 million, and the vast majority of them range between, $15 million and $25 million is the majority of the portfolio. 59% of the office portfolio is in Florida, where the demand and demographics continue to be generally favorable. Substantially all of the Florida portfolio is suburban. Our overall exposure to central business district-type towers is very modest. Maybe of the 99 loans, we have about 12 of them that I would actually call kind of downtown office tower buildings, the rest are all suburban-type property, and again, substantially in Florida. There’s some charts on Slide 15 that will give you further geographic breakdown of that. With respect to the New York Tri-State portfolio, again, not much difference, 43% is in Manhattan, about $181 million of office in Manhattan, 96% occupancy within that book, and a 12-month lease rollover of 4%.

Rent rollover in the next 12 months is a small portion of the office portfolio at about 10%. We have seen some increases that we have expected to see in criticized and classified office loans. I thought I’d give you a little bit of a sense of kind of what those issues look like by maybe pointing out a couple of situations. So, when we look at loans that are in that category, generally what we see is office buildings undergoing lease transition, and they fit into a couple of categories. One, our largest criticized and classified loan happens to fit into this, where it’s an office building in suburban Miami in a high-demand area where the actual occupancy today is 98%, but unfortunately, you have one large tenant that came in as a new tenant six or seven months ago, and the demand these days generally allows for credit tenants to get 12 months of concessionary lease payments, so you have a period of time where the actual occupancy of the building is 98%, but the economic occupancy is far less.

So we know when those lease payments will start. We kind of have it on a calendar. We know when — what the pro forma debt service coverage will look like once the lease payments do start. But regardless of who the tenant is, it could be the US government, we don’t start to count that in place cash flow until it’s paid, until we have a maturity on the lease payments, which is normally 90 days after the commencement of the lease payments. So we have several buildings that are kind of in this sort of transitionary stage, where you have occupancy that really is in the 90% range, where you have pro formas that would be well above kind of past loan policy guidelines, but they’re in this kind of transition stage with new tenants. And we also have loans that like everyone is seeing in the market, where you have some vacancies, where you have lease up going on and properties being subdivided and whatnot, but there are situations where we see activity and lease up in the market, particularly in the Florida suburban market.

So you might have a 20,000-square foot lease that goes vacant, and then you have to sub-divide the property, and it just takes time to kind of work through this. In general, we think the asset owners are supporting their assets. They’re putting money into them. They’re making investments in the properties. They have significant equity in it, and I think we’ll just be in a handful of these situations for a period of time as we work through this kind of lease transition phase. But I did want to provide you a little bit of anecdotal information that I thought would be helpful for sort of understanding the dimension of the office book that we have. So hopefully that was helpful. With that, I’ll turn it over to Leslie.

Leslie Lunak: Thanks, Tom. As Raj said, net income for the quarter was $48 million or $0.64 per share. The margin was 2.57% this quarter, compared to 2.60% last quarter. The yield on loans was up from 5.69% to 5.78%, that’s just really portfolio transition as new production is coming on at higher rates and lower yield in loans, including resi loans are paying down. The yield on securities did decrease from 5.73% to 5.59%. This was really driven by retrospective accounting adjustments that we booked in the fourth quarter that made that fourth quarter yield, I guess for lack of a better term, artificially high. What you’re seeing now is [probably] (ph) better sense of the run rate. The cost of deposits was up 22 basis points from 2.96% to 3.18%, and as Raj mentioned, this appears to be stabilizing.

So that’s really good news for the margin going forward. The average cost of FHLB advances was down to 4.18% this quarter from 4.58% last quarter, as we are paying down those higher rate advances. Our NIM guidance, we do continue to expect NIM to expand for the full year ’24 compared to ’23, and we think Q1 was the low point. I’m going to remind you again that this guidance is based on our continued success in transforming and remixing the balance sheet on both sides, much more than on anything that the Fed might or might not do. In fact, in answer to a number of your questions, we ran a scenario with the same balance sheet transition assumptions and no cuts in 2024 and it moved to the margin by one basis point, and it moved it up by the way.

It just doesn’t really matter. What’s going to drive our margin is our success in doing what we’re trying to do to the balance sheet. Provision and reserves, the provision this quarter was $15 million. The ACL to loans ratio increased from 82 basis points to 90 basis points, and the ratio of the ACL to non-performing loans increased to 188% from 160%. The big drivers of this quarter’s provision and the increase in the ACL, the biggest one was an increase in qualitative reserves, and a lot of that related to the office provide portfolio. Another driver was risk rating migration and those were partially offset by improvements in the economic forecast. And you can see a chart on Slide 17 of the deck that kind of gives you a waterfall of the changes in the ACL.

The reserve on the commercial portfolio, and when I use that term, I’m talking about all C&I, all CRE, franchise finance and equipment finance, not mortgage warehouse, and pinnacle, because those have unique risk profiles, so they’re not in this number, but that commercial reserve was 1.42% at March 31. The reserve on the office portfolio was 2.26% at March 31, and most of that build was qualitative and really prompted by the fact that we have seen some risk-rating migration there as Tom spoke to earlier. I would also point out that our total CRE reserve right now is about six times our lifetime historical loss rate, so pretty generous reserve there. Non-interest income and expense, not much to comment on here. Raj referred to the $5.2 million of additional FDIC special assessment this quarter, and we had about $6.5 million in residual losses on lease equipment last quarter compared to $2.7 million in residual gains this quarter, so that caused a swing in the fee line.

The ETR was a little high this quarter because of one discrete item, but our guidance around that going forward hasn’t changed. With that, I will turn it over to Raj for any closing comments and then we can take the questions.

Raj Singh: This is about as clean and as good a quarter as we could have hoped for 90 days ago. Very happy with where everything landed and looking forward to the rest of the year very optimistically. So, we will take Q&A now.

Operator: Thank you. [Operator Instructions] And our first question coming from the line of Benjamin Gerlinger with Citi. Your line is open.

Benjamin Gerlinger: Hey, good morning, everyone.

Raj Singh: Good morning.

Leslie Lunak: Hi, Ben.

Benjamin Gerlinger: I hate to belabor the point too much, but I was curious, can we just talk through the CRE provision increase? I know you talked through the qualitative overlay and then there’s quite a bit in terms of like the office and I think a lot of that is really, really helpful, but I’m just kind of trying to square the circle. It sounds like things are good, but then you also did increase the reserve a healthy amount, so just kind of thinking about the dynamics associated with that. Are you expecting losses or is it more CECL accounting? I’m just trying to square those two circles because things sound good, but then you also did increase the reserve.

Leslie Lunak: Sure. You guys been asking us to increase the reserve. No, I’m just kidding, that’s not why we did it in case the SEC is listening. But no, I think, Ben, we don’t expect — we expect any losses in our CRE portfolio to be very manageable. But I think it’s also prudent for us to recognize that the environment, particularly around office is challenging, and we have seen some risk rating migration going on there, and so what we did to kind of come up with that qualitative reserve is we just made some broad assumptions around, so what if cap rates increase a lot more than current commercial property forecasts indicate that they’re going to and what impact might that have? So that was sort of how we thought about it. I do think we are not expecting a lot of lost content in this portfolio, but we do recognize that the environment is challenging and we’re seeing some risk rating migration. I hope that helps.

Benjamin Gerlinger: Yeah.

Raj Singh: Ben, I want to add one thing, a general comment about risk rating migration. We take our risk rating, the intellectual honesty that goes into risk rating very seriously. We don’t ever try to play games with that. We call the risk the way we see it. We don’t try to say we are overly conservative or overly non-conservative. We try to be as down the middle of the pack because risk ratings are whatever you call the loans, they’re not going to determine if eventual performance — eventual performance for the loan is determined by what a customer does or does not do, or a borrower does or does not do. Risk rating is what you think of that loan along the way, and if you try and play games with that, you just lose credibility with your stakeholders, whether it’s regulators or investors or what have you.

So we try to be as straight down the path on risk ratings. And when we see risk build-up, we call it out and we move risk ratings down. I think that’s a very important aspect of running a company and having credibility in the long term. I will point to the fact that during COVID also we called out risk early and our risk ratings, we downgraded them because we saw risk. And we saw a lot of our peers not do that and we’ve scratched our heads like how can you not call the situation more risky given that we’ve had the biggest health crisis in the history of the country. So just a comment about — there is obviously more risk in office today than it was a few months ago. And we’re calling it out and we’re also reserving qualitatively, but reserving for that.

Leslie Lunak: And I think a follow-up to Raj’s comment about COVID, all of that, we downgraded loans, we increased our reserve, and we never saw any lost content [Technical Difficulty]

Benjamin Gerlinger: Yeah. Got you. Yeah, that’s helpful color. Appreciate it. And we can just kind of pivot here for the next one. I know that you guys are kind of baking in some growth. I know that — I think you said higher loan balances ending for year-over-year. Just kind of curious on the cadence of that growth, where it might come from. Because I’m really trying to back into it, it’s like the mix on the asset side of the balance sheet is really going to be the driver of PPNR from this point it seems like. So I’m just trying to get a sense of, like, where your exit margin might be based on that growth and kind of the pricing. I know Leslie kind of touched your third rail, but just kind of curious if you could narrow it down, considering rate cuts are probably de minimis for your margin outlook.

Leslie Lunak: Yeah, I would say similar to what we told you last quarter, we expect the margin to be in the high 2s by the end of the year. That’s not — that guidance is unchanged from what we told you last quarter. We expect the resi portfolio to continue to amortize down at about the pace you’ve seen over the last four quarters. So another, for the year, probably $800 million or so. We expect the growth to come from our core middle market commercial portfolio, primarily C&I, maybe some CRE, but primarily C&I. We expect double-digit growth in that segment. So that’s, probably the subs, which are now getting very small, but pinnacle and bridge will probably not grow. Bridge will probably continue to wind down, pinnacle for the time being, given pricing dynamics and that market will shred water.

Benjamin Gerlinger: Okay, helpful. I appreciate. I’ll step back.

Operator: Thank you. And our next question coming from the line of Stephen Scouten with Piper Sandler. Your line is open.

Stephen Scouten: Hey, good morning, everyone. Thanks for the time. I guess I was curious, one, I mean, you guys took up your dividend here this quarter. I was wondering if there’s any updates on the thoughts around the share repurchase. Capital continues to build. You’ve been building the reserves. It seems like at these levels you might be more apt to do a buyback. So I just wonder, any updated thoughts there?

Raj Singh: Yeah, there is not an update. We do continue to talk about it at each of our Board meetings. So in the May Board meeting, we will again have a conversation. But I’m not expecting a buyback yet. We are changing our mix of our balance sheet. So keep in mind, from a risk-weighted assets perspective, we are talking about taking down low-risk-weighted assets, like resi, and replacing them with high-risk-weighted assets, C&I. So yes, capital does build up, but capital ratio — TCE will build up, but CET1 doesn’t build up quite as much because of the change of mix of assets, which is necessary for us to improve margin. So we will — the Board had — we’ve talked about the buyback back in February when we took the action on dividends.

We will talk about it in May and I don’t want to get in front of that discussion, but I think buyback is probably more — it’s probably in the second half of the year is when it will get — we will take a harder look at this. I doubt if it will be in May.

Stephen Scouten: Okay, that’s really helpful, Raj, thanks for that. And then I’m just kind of curious on thinking about the loan loss reserve, obviously, went up 8 basis points and you’re incrementally more protected, but if I look at that waterfall chart and I see the economic forecast component kind of going down, was that — am I reading that right where there was some scenario weighting adjustments that you guys made to take that number down or what’s kind of the dynamics of that around the economic forecast?

Leslie Lunak: Most of that is just that the forecast is better than it was three months ago.

Stephen Scouten: Okay. So no change to the way you guys are waiting to the various scenarios.

Leslie Lunak: We tweak that every quarter, but really, we’re just seeing better forecasts, and so the model — loss results are coming down, coming out of the model.

Stephen Scouten: Got it. And then just last thing for me, obviously, great momentum on the non-interest bearing deposit, sounds like Tom said the pipelines were pretty good on the treasury side as well, kind of curious what you think you can do there. I know it’s hard to predict through the full year. And then maybe kind of an update on Dallas in particular on what sort of progress you’ve seen. How much that may or may not be contributing to the positive momentum there?

Raj Singh: It’s too early for Dallas to contribute anything meaningful, so these numbers are not really because of Dallas. There’s obviously some growth there, but it’s small compared to the total number. But, Tom?

Tom Cornish: Yeah. When we look at the markets that we’re in, I would say, this was — this last quarter was a particularly good hiring timeframe for us. We added to the teams in Atlanta. We added to the teams in Dallas. We made some really good key hires in the corporate banking space in Dallas. It is too early for any major results to kick in yet. We are seeing good activity, good pipeline build, business coming in, but that’s not predominantly driving the numbers that you see in the $404 million of NIDDA growth. That was really more across existing geographies and existing lines of business.

Stephen Scouten: Got it. Got it. And think that progress can continue based on what you’re seeing in the pipeline, I guess, is the general message?

Tom Cornish: Yes.

Stephen Scouten: Fantastic. Thanks for the color and congrats on all the progress.

Raj Singh: Thank you.

Operator: Thank you. And our next question coming from the line of Jared Shaw with Barclays. Your line is open.

Jared Shaw: Hey, good morning, everybody.

Raj Singh: Good morning.

Leslie Lunak: Good morning, Jared.

Jared Shaw: Maybe just following up on the deposits and funding, with the trends that we’re seeing in DDA, one, I guess, would you say, are you also seeing continued remix from existing customers offset by the new customers bringing money in, or do you feel like on an average account basis, we’re sort of at the bottom on average DDAs here?

Raj Singh: It’s a little hard to say. I think there is still some bleed happening on older relationships, which is — what you’re seeing the $400 million or so is net growth. So I think there’s still some of that happening. But we’re trying to kind — we are not trying to — we’re out running it with new business coming in the front door. So I think it’s still a little bit of a leaky bucket, I think, if that’s what you’re asking about.

Jared Shaw: Yeah.

Raj Singh: But — yeah, I think there’s some of that still happening. You do wonder like, you haven’t woken up yet, but I think — I think the leaky bucket phenomenon is still true, but we have a lot of momentum on filling the bucket with new business, and based on what business was closed this quarter, but also based on what’s in the pipeline.

Jared Shaw: Okay. And then on the deposit beta, do you think we’ve seen the peak here even if we don’t get rate cuts, should we expect to start to see a gradual decline either from that remix of DDAs or not having to pay off as much in market to retain some of those interest bearing deposits?

Raj Singh: I certainly hope so, or at least stability. Seeing the numbers from Jan, Feb, March, and into April, we’re seeing complete stability. It’s been absolutely flat. I get a report every morning what the deposit book looked like the night before, and usually I look at DDA and total, it’s nice to see the far right column, which is the cost of funds basically or changing cost of funds, looking pretty stable. So yeah, it looks like it’s stable. When will it start declining without the Fed moving? DDA keeps building up the way we are thinking it will start declining as well. But yeah, we have reached that inflection point, it certainly feels better.

Jared Shaw: Okay. And then finally for me on the office side, you talked about some of the rent concessions to get new tenants. Have you been noticing landlords having to increase either the rate or pace of concessions to attract those new tenants is one part of it. And then I guess what gives you confidence that the expected lower occupancy levels are temporary? Is that just you have some insight into the pipeline for those landlords?

Tom Cornish: Yeah, I would say two things, I don’t think in most of the markets that we’re in, the concessionary period has expanded. Now, if you’re in San Francisco or Chicago, I’m sure that’s true, but in better growth markets, generally, you’re seeing kind of a 12-month period of time and we’re not seeing any major changes in that. The confidence really comes from sort of the underlying demographics of what’s happening in the market. So if you look at markets where we have significant office exposure, like spread out through Florida, for example, if you look at the underlying demographics and inflow business migration, new business startups, and whatnot in Miami, in Fort Lauderdale, in Palm Beach, in Tampa, it’s good, I mean, there’s really…

Leslie Lunak: Lease-up activity…

Tom Cornish: And you’re seeing the lease-up activity from that. I mean, the amount of new migration of companies that come to a market, the expansions that are being done is just really strong throughout virtually every market in Florida. So that’s what gives you confidence to see that as you’re looking at very, very strong population and business growth that requires a lot of these buildings are professional services oriented, technology oriented, and you’re just seeing growth across all of those industry segments within Florida.

Leslie Lunak: And I would also point out, in Manhattan in particular, the rent rollover in the next 12 months is only 4%, so…

Tom Cornish: Yeah, I mean, even if you look, there was a recent report in the journal, I think yesterday, that said New York City led the country in creating new tech jobs, and while we don’t have a lot of buildings in New York, I think they had a [3.5] (ph) number as a growth in the tech-related return to office and new job environment that comes into those buildings. So the markets that we’re in, I think, are generally giving us reasonable confidence that we’re seeing business activity that will lead to leasing activity.

Leslie Lunak: The other thing I would say, I know we’ve said it kind of jokingly, but Tom really is sitting here with a stack of paper in front of him that has on it details of every single loan in the office portfolio. So I think the granular level at which we are monitoring and paying attention and gathering information about the loans in this portfolio is what gives us the confidence in this portfolio. We really do know what’s going on with each and every one of these.

Raj Singh: Portfolio management has been at a different level.

Tom Cornish: I mean, our teams are visiting these properties consistently. They’re talking to the asset owners. They’re talking to the leasing agents. I mean, they have a very granular level of knowledge of what is going on in each and every property.

Jared Shaw: Great. Thanks very much.

Operator: Thank you. Our next question coming from the line of Woody Lay with KBW. Your line is open.

Woody Lay: Hey, good morning, guys.

Raj Singh: Good morning.

Leslie Lunak: Good morning, Woody.

Woody Lay: Just one follow-up question on the non-interest bearing deposits. As you mentioned, it looks like it all sort of came on in the final month of the quarter. All those deposits should be sticky. There’s no seasonal factors there.

Raj Singh: No. I mean there are seasonal trends to certain businesses that we’re in. There are monthly trends, there are seasonal trends, but a lot of that growth was new business, some of it was certainly seasonal as well. We had a decline in DDA last quarter, as always happens in December, and we’re now seeing that buildup. That buildup, it’s not like we’re in high season. That buildup will continue to happen. So we expect the seasonal changes to keep helping us as we get into the summer. No, there isn’t any lumpiness that I’m worried about that is here one quarter and gone the next quarter, no.

Woody Lay: Got it. And then I wanted to shift over. I think in the release you mentioned you saw some shared national credit runoff. I was just wondering if you could quantify that on a dollar basis and do you think that’s a trend that continues from here?

Leslie Lunak: I don’t have those numbers in front of me right now, Woody, but I’ll let Tom speak to what his expectations are.

Tom Cornish: I would say, when it comes to that segment, we consistently try to look forward and see where we see risk in the economy and when we make those decisions to exit those credits, and there were a couple of them this quarter. There’re typically areas that we look at where we are not as optimistic about the trend lines in those industry segments. And that’s typically where we make that kind of decision. They’re a bit more episodic based upon how we’re viewing what might be happening in a given industry segment versus kind of — I mean, our long-term strategy is to build bilateral business with operating accounts and treasury management business and whatnot. We do have — we are in some shared national credits on both corporate side and the real estate side, but we generally think about it from, do we have confidence in the next 12 to 24 months in where this sector is going, and when we don’t, we try to take opportunities to exit at maturity or redials.

Woody Lay: So those credits that were exited, I mean, did they have a deposit relationship with the bank? And does the majority of your national credit portfolio have a full banking relationship?

Tom Cornish: The credits that we have exited did not have depository relationships. We have a portion of our book — the shared national credit book breaks down into kind of different categories. For example, if we are the lead bank in the shared national credit, which we are, then we have the depository relationship and many of the shared national credits we’re in, we may not be the lead on the credit, but we’re the depository agency — agent for the relationship. In some we have — it’s not one broad statement across all lines, but I would say, in shared national credits, where we are neither the agent nor the depository bank, our general bias would be those are relationships that are probably going to be de-emphasized going forward.

Woody Lay: Got it. That’s helpful commentary. That’s all for me. Thanks, guys.

Operator: Thank you. And our next question coming from the line of Steven Alexopoulos with J.P. Morgan. Your line is open.

Steven Alexopoulos: Hey, good morning, everybody.

Raj Singh: Good morning.

Leslie Lunak: Good morning, Steve.

Steven Alexopoulos: I know you’ve had a bunch of questions on office CRE, but I had a bigger picture question for you guys. When investors or analysts ask the larger banks, like what’s your outlook? Where’s the risk? Inevitably the answer is the regional banks are holding the risk on office CRE. I didn’t really hear that in your response to all these questions, and time you working through some of these challenges. Do you guys agree with that, that the regional bank — I mean, you see what your peers are doing, do you think you’re an exception to the rule and your peers are in trouble as asset class or what you’re experiencing, do you see as fairly typical?

Raj Singh: Yeah. So I’ll start, and Tom, you chime in. I think the first place where I would somewhat agree is the fact that regional banks do have more CRE exposure in general than the Top 10 banks, for example. So just look at CRE to risk-based capital ratios like that, yes, smaller banks, community banks, all the way up to regional banks do have more CRE exposure. But from there on, I actually will start to disagree. Different banks have different types of CRE and you can have a regional bank with average ticket size of $1.5 million another one at $15 million, $18 million like we do, and then there are regional banks that have very large exposures, and each one of them will have a very different risk profile. So generalizing it beyond just saying, yeah, generally speaking, regional banks have more CRE, that’s the only statement that applies, but beyond that, you really have to dig into what kind of lending each bank is doing, and it can be quite different from one regional bank to the next.

We obviously know our book better — best, and I can’t really talk much about another bank that might be doing very small ticket CRE or very large ticket CRE, those risks might be quite different. But with the risk profile that we have, starting with the fact that we have much lower CRE than typically a bank our size would have. And the kind of CRE we’ve done, it’s sort of $15 million to $18 million type of average ticket size. We don’t have very super large loans, but we also don’t have very small $1 million, $1.5 million loans either. And the mix that we’ve formed and the markets that we serve, we feel pretty good about our portfolio. But to your bigger point, I think it’s more complex than making a very generalized statement.

Tom Cornish: Yeah, I would — Steve, I would add, I would agree with what Raj said. I also think, when you look at our portfolio in total CRE, and you scope out all of the banks in the $10 billion to $100 billion range, we’re clearly at the lower end of overall CRE exposure, and we have always, I think, maintained a good discipline around asset diversification within that book, no one asset is more than 25% or so of the entire base, and we spend a lot of time thinking about asset allocation within that book, and asset allocation within the total portfolio, and also project limits. So as Raj said, generally, our portfolio across all asset classes within CRE is what I would kind of call a middle-market real estate portfolio. We’re not typically in loans above the $15 million to $30 million range.

We’re not sitting with $100 million loans on towers and major construction loans. And the last part is, I think generally, over a long period of cycles, most people would agree that your risk is in the construction. Loan portfolio is a higher risk element and that’s always been a very modest part of our overall portfolio. I think right now it sits at about 8% of the portfolio.

Leslie Lunak: The CRE portfolio.

Tom Cornish: The CRE portfolio, correct.

Raj Singh: Just one more thing. The difference between CBD and suburban is pretty stark, and I think paying attention to that, two banks with the same exposure, same numbers, but if it’s CBD versus suburban, that makes the difference between banks, it can shed a lot more light about where the risk is.

Tom Cornish: Even within submarkets, I’m staring at this piece of paper that we keep referring to and we break it down by submarket, no submarket is over-weighted in any area. So we pay attention to what’s in Tampa, what’s in New York, what’s in Miami, what’s in Fort Lauderdale, because all of these economies do have some levels of difference, different types of business mix, and we — so we keep it at asset levels, asset allocation levels, submarket levels, project levels. We have pretty disciplined approach to this.

Steven Alexopoulos: Got it. All other questions have been answered. Thanks for that detailed response.

Raj Singh: Thanks, Steve.

Operator: Thank you. Our next question coming from line of David Bishop with Hovde Group. Your line is open.

David Bishop: Yeah. Good morning, everyone.

Raj Singh: Good morning.

David Bishop: Hey, Leslie, quick question. I think you mentioned that there were some maybe waterfall payoffs or repricing on the CD book this quarter. Just curious, maybe what that looked like and maybe what the repricing looks like over the next quarter or two on that book, and what the average rate is looking like currently?

Leslie Lunak: I mean, we had about $900 million or so repriced in the first quarter. I don’t know, somewhere between 30 basis points and 50 basis points. But that really was the cliff. I think going forward, it’s pretty tame and spread out. So I think we’re kind of past the cliff and you can see the impact of that embedded in the change in the cost of funds for the quarter.

David Bishop: Got it. And then, I know there was some noise obviously in fee income in the fourth quarter. Just curious if you think this first quarter rate represents a decent run rate or good approximation heading out to the rest of the year? Thanks.

Leslie Lunak: I mean, for the most part, yes. These leasing residual items are going to be episodic and sporadic. The portfolio is small enough that those don’t occur with a regular predictable cadence. So you saw some of that. You’ve seen a little bit of that every quarter the last several quarters, and those things will be sporadic, but if you pull that out, yes, probably.

David Bishop: Perfect. Most of my questions have been asked and answered. Thank you.

Raj Singh: Thank you.

Operator: Thank you. And I see no further questions in the queue at this time. I will now turn the call back over to Mr. Raj Singh for any closing remarks.

Raj Singh: Thank you everyone for joining us. We will speak to you again in three months. In the meantime, you know how to reach us. Thanks, bye.

Operator: Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.