BankUnited, Inc. (NYSE:BKU) Q3 2020 Earnings Conference Call October 28, 2020 9:00 AM ET

Company Participants

Susan Greenfield – Corporate Secretary

Raj Singh – Chairman, President & Chief Executive Officer

Tom Cornish – Chief Operating Officer

Leslie Lunak – Chief Financial Officer

Conference Call Participants

Jared Shaw – Wells Fargo

Steven Alexopoulos – JPMorgan

Stephen Scouten – Piper Sandler

Brady Gailey – KBW

Ken Zerbe – Morgan Stanley

Brody Preston – Stephens Inc.

Christopher Marinac – Janney Montgomery

Steven Duong – RBC Capital Markets

Ebrahim Poonawala – Bank of America

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the BankUnited, Inc. Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker to Susan Greenfield, Corporate Secretary. Thank you. Please go ahead.

Susan Greenfield

Thank you, Dwayne. Good morning and thank you for joining us today on our third quarter results conference call. On the call this morning are Raj Singh, our Chairman President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer.

Before we start, I’d like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflects the company’s current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries 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 limitation, those relating to the company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-19 pandemic.

The company does not undertake any obligation to publicly update or review any forward-looking statement whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company’s annual report on Form 10-K for the year ended December 31, 2019, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC’s website, www.sec.gov.

With that, I’d like to turn the call over to Raj.

Raj Singh

Thank you, Susan. Welcome everyone to the earnings call. It was 90 days ago when we last talked to you we’re still in the same format. I’m happy to be back in Melville at least on a part-time basis. And Tom and Leslie are in Miami Lakes, it’s nice to get away from our Zoom calls

Last we spoke the environment. I just want to remind everyone where we were. It was July, we have seen the worst of the virus behind us. There was a recovery in New York was doing well. Florida was beginning to spike in cases and spike pretty sharply and we were quite nervous at that time.

So the good news is that spike was controlled and numbers came down and we did not see an impact on the economy in Florida, the economic activity continued well. Here we are 90 days later, I feel like this is déjà vu. We’re seeing a different kind of spike. This time not so much in Florida, not so much in New York, but generally overall in the country. So I’m hoping this is just déjà vu. And what follows on the economic front will also be déjà vu and we will not see much of an impact like it happened three months ago and then this becomes a nonevent economically speaking. But I’m also hoping that this is not Groundhog Day and we are not talking about this 90 days down the road again.

So with that, I would like to just say that our fans generally in the economy is cautious optimism. There’s a number of things that have gone in the right direction over the last quarter, if you compare what happens 2Q to 3Q. So we’re very happy and optimistically looking at those numbers. At the same time, we are taking a big dollop of caution given all the uncertainty that still exists with the virus and as well as the political realities. We have an election in less than a week. We have a similar still that everyone has been talking about forever. It doesn’t look like it’s going to get done anytime soon. So there’s a fair amount of uncertainty out there, which adds to our cautiousness.

With that, I will quickly jump into our earnings to walk you through how we did over the last three months. The — we came with $66.6 million of earnings over the third quarter with $0.70 a share. If you compare it to last year we were at $0.77 a share this quarter. And just compared to last quarter, we were at $0.80. I think the Street expectations were in the low or mid-60s, so slightly better than expectations.

Now given the fact that this is about six months from the biggest shock to our economy in living history. I think that’s the pretty decent numbers based on what has actually happened in 2020.

Our PPNR continues to grow nicely year-over-year, though it did decline a little bit from last quarter and Leslie will talk to you isn’t any one big thing that points to it. It’s just $1 million here or $1 million there, which adds up to a slight decline compared to last quarter. But over the longer term compared to a year — compared to last year, our PPNR this time was $115 million. I think third quarter of last year was $102 million. And for nine months, our PPNR was 3.23%, compared to 3.09% for nine months last year.

I’ve always said from quarter-to-quarter there can be volatility in good direction and bad direction; you shouldn’t really look at any one quarter on annualized. You should at least have a 12-month view and that kind of evens out seasonality and ad hock things that happen from time-to-time.

The big story here before I talk about credit is on the balance sheet is about deposits. We again had a very strong deposit growth quarter, but what’s more important than just the total growth in deposits is really what kind of deposits came in. So, we had DDA grew by $906 million, that’s a 15% growth over the last quarter. And now our deposits — our DDA deposits stand at 26% of total deposits.

If you remember just two and a half years ago when we started pushing DDA, we were in the mid-teens. So, it’s a big change in our deposit portfolio for the better over the last two, two and a half years.

Our cost of funds came down to 57 basis points, that’s a 23 basis point drop. And of course, the change in mix helps, but we also — they’re running off of the CD book and also we took down a lot of money market and savings rates which helped to reduce our cost of funds by 23 basis points.

Now, that’s 57 basis points for the quarter. We actually ended the quarter even lower because that’s the average at a point in time, Leslie; I think the number was 49 basis points. Wave if you think I’m wrong, 49 basis points. So, we did hit a full handle literally in the last day or the last two days of the quarter.

So, we’re starting the fourth quarter already at 49 basis points and based on what I can see so far the first three, three and a half weeks of the quarter, we are — the trends that you’re seeing in third quarter continue. So, you should expect growth, you should expect DDA growth, and you should expect continued drop in cost of comps. Maybe not 23 basis points, but it will still be a pretty solid number.

Let’s talk a little bit about the loan portfolio, that side of the balance sheet. The — last quarter we had reported $3.6 billion or 50% of the loans have been granted, the initial three month deferral. So, updated through October 25th, that’s at the last day that we could pick before we went pencils down, for commercial loans and September 30th for residential loans. Residential data is a little bit older, $983 million or 4% of our loan portfolio was either on a 90-day deferral or have been modified or was in some process of being modified. So, those three buckets add up to $983 million.

Now, as you all know a significant portion of our residential portfolio even though they are technically have a deferral they actually show pain as usual. So, if I back those loans out, then that $983 million drops to $788 million or 3.3% of loans that fall into one of these three buckets. So that compares once again to 15% who were granted the initial 90-day deferral.

Quickly going to the P&L, and again like I said, Leslie will dig deeper into this. NIM declined by seven basis points from $239 million to $232 million, largely because the investment portfolio came down and all our excess liquidity was deployed in the investment portfolio rather than in the loan portfolio.

Investment portfolio grew by $607 million and loans declined by $69 million. Loan demand is fairly weak with the exception of anything to do with residential. There of course we saw growth both in the warehouse business and the residential business as well.

Provision was $29.2 million this quarter that compares to $25.4 million last quarter. So, basically in line. Reserves were now at 1.15 — 1.15%. They were at 112 basis points last quarter. So, again, pretty steady.

Book value has increased to $31.01 which is basically very close to where we were at — before COVID. So, December 31st, we were at $31.33. So, we’re pretty close back to it.

Part of what help here was obviously we saw continued improvement in the OCI. If you remember we had a pretty big mark on the investment portfolio in March. We were — we had a negative $250 million round numbers mark that have improved to just negative $2.5 million last quarter and now we’re up positive $62 million. So, all of that helps picking a book value and tangible book value.

Our capital segment capital was 12.1% at Holdco, 13.5% in the bank. We, of course, certainly to pay our $0.23 dividend. If you recall, we have increased the dividend in February. And even before we get a question on share repurchase, we are not yet buying back stock. We still think we need more optimism and more stability out there before we turn to share repurchases as an option.

I think that will be a discussion point at the Board meeting in November and probably again in February, but I would think that will probably be at least until first quarter before we move on this given what we’re seeing over the next few weeks there’s still a lot of moving parts to this economy.

NPAs let’s quickly get into some credit ratio. NPA ratio was down just a little bit from 58 — 258 basis points compared to 60 last quarter. If you carve out the guaranteed portion of SBA loans it was 46 basis points compared to 47 last quarter.

NPLs, again, we’re at 84 basis points. But again if you exclude the guaranteed portion of SBA loans they were at 66 basis points. So year-to-date net charge-offs are at — running at 25 basis points. We took $24 million in charge-offs this quarter. $22 million of that $24 million was one credit that we have been talking to you about for some time. This credit had gone into work out around this time last year.

We have been collecting nicely every month. We were bringing this balance down. But as COVID hit, payment stopped and, to be honest, what started look — started as a credit loss is beginning to look more and more like a fraud loss. So we’re pursuing the guarantors and we’re in litigation. But we’ve taken a fairly big charge-off and we’re fully reserve for this loan.

Risk rating migration, we continue to see risk rating migration this quarter, particularly, into the substandard accruing category. We take pride in basically the fact that when we see risk, we call it out. We don’t try and kick the can down the road. So that’s the direction we’ve given our risk people. If you think there are signs of stress, whether it’s in cash flow or revenue or liquidity or leverage or anything, you call it the way you see it. So that’s — you will see that in the numbers.

Quickly, in terms of just operational matters. We are still pretty much remote. We did start very selectively opening up a couple of our offices in Long Island and West Chester. We did allow about 20% of people to return. More as testing the waters than anything else. It is voluntary and people — employees who want to come back can come back. And, of course, we’re taking all kinds of precautions to make sure everyone is safe.

But a large part of our employee base is in Miami Lakes and we haven’t done that and it will probably be at least a month or two before we do anything in Miami Lakes. There’s no reason to be heroic in terms of bringing everyone back. So that’s my stand on that front.

Not much of an update on 2.0. The low-hanging fruit on the expense side, as you know, has already been harvested and we’ll continue to go after more expense where we can. On the revenue side, we did launch the commercial card program. It was delayed by just a few weeks. It was launched in August. I’m surprised given everything that’s happening, we were able to hold that time line. And also on treasury management and payment side, we’re increasing that suite of products.

So, all is well on the 2.0. And in environment like this, the priorities that I have asked the team to focus on. One, obviously, is credit. We have to manage our credit book. And two is, in the long term, we have to keep building our DDA book. We want to be an operating bank, not just a place where people talk money. And you’re seeing that this is not just accidental when that level of growth is coming in.

Of course, the environment is helping, but there is a lot of investments that we made over the last year or two, a lot of effort that was put in that is paying off and that $900 million of DDA growth. This is the quarter in which we’re supposed to have light growth, because PPA money — PPP money was running off.

And instead of — and some of it did run off and some of it will run off in the future. But despite that you see nearly $1 billion of DDA growth in an environment where we’re all hiding under our beds and not really going out and socializing with clients, that’s a pretty impressive number.

So with that, let me turn it over to Tom who will talk to you a little more about the balance sheet. And then, Leslie will take over from there.

Tom Cornish

Great. Thanks, Raj. Well, I’ll start off with the deposit side. We certainly weren’t hiding under our bed on the deposit side. As you can see, we’re very proud of the fact that we had NIDDA growth, as Raj mentioned, of $906 million for the quarter. And even beyond that number, it was encouraging to see the same trends we saw last quarter and the quarter before, that growth is really very broad across all of the operating teams in the bank all of the business lines are developing significant new operating treasury management business. And this certainly led to a strong quarter of $906 million for this quarter.

We continue to allow higher cost deposits to run off for the quarter, as time deposits declined by $843 million and that left us with a total deposit increase of $527 million. Raj mentioned the PPP deposits. While it’s difficult to be precise about this, we estimate that about $300 million of our current base of non-interest DDA on the balance sheet at quarter end is related to BU PPP loans, where we still see the proceeds in the borrowers’ checking accounts at this time. So good portion of it has been used, but we still think we have about $300 million left.

As Raj mentioned, the cost of total deposits declined to 57 basis points this quarter, on spot rate the APY on total deposits was 49 basis points as of September 30, down from 65 as of June 30 and 142 basis points at December 31, 2019. The spot rate on interest-bearing deposits was 65 basis points on September the 30.

Reduction in the cost of deposits this quarter was also broad-based across all product types, all lines of business and we have a very significant effort and methodical effort going forward to continue those trends. As of September 30, 2020, $1.5 billion of the CDs, at an average rate of 1.67 has not yet repriced since the last fed cut in March. So we’ll see the majority of those reprice over the next couple of quarters. And additionally, some of the CDs that matured and repriced early in this current cycle that we’re in we’ll probably reprice again at their next maturity date. So we should see some added benefit from that as well.

As we look across the sales opportunities in the bank and the pipelines, I think we continue to see healthy pipelines and opportunities for core deposit growth across all of our business lines. It’s somewhat more difficult to size deposit pipelines and loan pipelines. Normally when you fund the loan, you fund the balance at the inception, usually deposits take a little longer to develop but we do expect non-interest DDA to continue to grow in this quarter and for some time. For the year, we would expect total deposit growth to be in the low double-digit number.

So let me switch to the loan portfolio. In aggregate, total loans declined by $56 million in the third quarter. That’s a little bit of a disparate story across different areas of the bank. We saw continued growth in the mortgage warehouse business. Outstanding balances grew by $90 million for the quarter, while commitments grew by $357 million.

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We actually grew the commitment base to an all-time record for us in that business line as of 930. The residential portfolio grew by $363 million in the third quarter, $264 million of that was in the Ginnie Mae early buyout segment.

Switching over to the more standard commercial areas of the bank, C&I loans declined by $254 million, as new originations were not sufficient to offset prepayments and lower line utilization. Right now, what we’re seeing line utilization from our corporate clients at kind of a historic low for the bank, which actually we think is in this current environment is probably a good thing from a credit quality perspective.

CRE declined by $97 million for the quarter, as the New York multifamily portfolio continued its downward runoff, as we’ve had over the last 12 to 14 quarters or so, although at somewhat slower pace. Balances in Pinnacle BFG-Franchise and equipment were also down for the quarter by $161 million.

As we look forward, we currently expect these trends to continue, we think total loans are likely to decline in Q4, leading to an overall growth rate for the year in the low single-digits.

Last couple of calls, we’ve spent some time just talking about strategy on the credit side. Strategy really has not changed significantly in the last couple of quarters. We’ll continue to be highly selective about new originations until we’re more comfortable with the long-term trajectory of the economy. And the impacts of the health care crisis.

We’re taking the position of increasing facilities to existing clients. We’re seeing some industry segments where there’s certainly growth and we’re seeing some plans in what I would call more mission-critical industry segments, where actually the M&A market is better. Valuations at this point are more favorable for acquisitions that they’ve been in a period of time and we’re continuing to fund into those opportunities as well.

We’re more cautious around totally new relationships, as the opportunity to know those clients and visit with those clients and review their operations, physically are more limited in this environment. So we are pursuing some new opportunities that we consider to be very, very high-quality balance sheet credit opportunities and especially those that are in the industry segments where we have the most capability, and also those that offer us I think the best long-term deposit opportunities in the near future.

On PPP, we recently opened up our portal and we’re starting to take forgiveness applications from customers. We expect PPP forgiveness to be largely a Q1 2021 event. 38% of our PPP loans by unit count are under the $50,000 level ineligible for the SBA expedited forgiven this process.

I’d like to go into a little bit now more detail on some of the deferral information and refer you to Slide 16 in the supplemental deck. We’ll talk more about two different time frames. In this part one, where we finish 930. And one as Raj mentioned is an update as of the 1025 number.

So from a commercial loan perspective $234 million of commercial loans were still subject to either the first or second 90-day deferral request. As of September 30, $246 million of commercial loans have been modified under the CARES Act and another $220 million of commercial loans were in the process of modification. All of this totaled about $700 million or approximately 4% of the total commercial portfolio as of September 30.

This number is relatively consistent with the $696 million that we reported on our commercial loans that we had received second deferral request on our last call. So that’s played out just about how we thought it would play out.

As of October 25, improvements in this area, $152 million of the commercial loans on short-term deferral had resumed payments, loans on short-term deferrals declined to $74 million and loans that had been modified or were in the process of being modified under the Cares Act totaled $493 million. In aggregate this was down to $567 million from 4% to 3.2% of the total commercial portfolio at 10.25.

Not unexpectedly the portfolio segment that has been most impacted has been our hotel portfolio within our CRE business line where 47% of the segment was on deferral or had been modified as of September 30. Of note 12% or 76% of the franchise portfolio was also on deferral as of September 30 compared to 74% that were granted the initial 90-day deferral and 25% for which a second deferral had been requested when we reported to you at the end of the second quarter. So the numbers have kind of come from 74% to 25% to 12% is sort of the trend line. Of the $76 million on short-term deferral at September 30, a very positive note $74 million of that $76 million is now resumed payments in October.

Onto the residential book, residential excluding the Ginnie Mae early buyout portfolio, $395 million of the loans are on short-term deferral. An additional $21 million has been modified under longer-term repayment plans as of September 30. This totaled 8% of the residential portfolio down from $594 million or 13% of the residential portfolio as of June 30.

As also note 49% or $195 million of the residential loans on deferral have continued to make payments during the deferral process or deferral period. Loans showed on the slide that I referred you to as modified or in the process of modification under the Cares Act or those for which the 90-day deferral period wasn’t going to be quite enough to see them through this economic phase.

I think particularly those in the more heavily impacted industry segments are going to be there but which we believe the longer-term modification will equip them to help get them through this period of time. Most of the Cares Act modifications have taken the form of 9 to 12-month interest-only periods for those loans.

I wanted to switch a little bit to talk about the real estate portfolio. And a little bit more depth as it relates to rent collections during the third quarter. So I’m going to give you some data. It’s samples of some of our larger loans within each of the asset classes within the CRE segment and these represent the average of the three months of the third quarter.

So if we look at different asset classes in the office segment we’re seeing rent collections for our loans that we sampled in the 90% range both Florida and New York are staying about consistent with that number. Multifamily is also performing well averaging in the low 90% also well in both markets.

Retail as we’ve talked about earlier is probably the segment where we’re seeing the most diversity among rent collections. Better high-quality properties and some of our larger loans are still seeing rent collections in the 90s, but that’s a fairly broad category. We’re seeing rent collections that are running anywhere from 40% to 45% up into the mid-90s depending upon property location in the type of asset it is tenant based and so forth. Within the industrial segment that continues to be a very high-performing segment and essentially rent collection in industrial is near 100%.

Switching a little bit more to hotels, right now all of our hotel properties in Florida are now open, which is a big positive. And two of the three properties are now open in New York. In the Florida market for the third quarter we’re seeing occupancy generally in the 40%-plus range as high as 45% for September, some weekend spots higher. Some property that’s predominantly leisure and beach even higher than that. New York is still suffering. Obviously business travel is down significantly in the New York market. As I said two of the three are opened. Occupancy is low but at least it’s starting to rise.

Switching to the franchise segment for a moment in restaurants the QSR casual dining space. We’re seeing kind of mixed trends depending upon service model stores with well-defined delivery pickup or drive through models. In most cases, we’re seeing double-digit year-over-year increases at this point. That’s particularly prevalent in some of the stronger pizza and chicken concepts.

While concepts below that are generally in the flat sort of range maybe to slightly down. And in-store dining casual remains probably the most challenged within that segment seeing same-store sales declines still on a national basis, but a little bit heavier than what I noted.

On the fitness front, we saw improvement in the third quarter in terms of the number of stores that are now open, 84% of our finance stores are now open for business. Really only New York, New Jersey and California stores remain predominantly closed at this time. So that’s 84% of our stores on $1 average basis of exposure, it would be about 70% of the overall exposure that we have.

So — and what we’ve seen in that market is memberships are coming back. Utilization is coming back in stores that were opened six, seven, eight weeks ago we’re now reporting more favorable results in stores that are opening up in the last couple of weeks are starting to see some climb as well. So we see improving trends overall in the fitness area as well.

So that kind of covers the loan portfolio and we’ll turn it over to Leslie now to get more detail on CECL and quarterly results.

Leslie Lunak

Thanks, Tom. So I know you guys are all just itching to dive into another conversation about CECL. So that’s where I’ll start. Overall, the allowance for credit losses increased from 1.12% of loans to 1.15% of loans this quarter. And I’ll refer you to slides 9 through 11 of our supplemental deck that give you some details on our economic forecast and changes in the reserve and the composition of the reserve.

A few offsetting factors impacted the reserve this quarter. We saw a $10.6 million increase related to the economic forecast, even though generally we’ve seen improvement in economic conditions. Our economic forecast committee selected a forecast scenario this quarter that was just slightly less optimistic than the scenario that we selected in Q2, which led to that. Charge-offs of $23.8 million reduced the reserve and the net impact of risk rating migration and increases in specific reserves offset that and increased the reserve by $27.3 million.

We had an $8.1 million reduction in the amount of our qualitative overlays, which at least in part is offsetting that increase due to risk rating migration as some of those qualitative factors are being captured in the quantitative reserve estimate.

However, we did think it was prudent to hold on to a large portion of the qualitative overlay that we put in place last quarter due to the level of uncertainty that’s still out there around the virus the election et cetera. We weren’t really comfortable with reducing all of those qualitative overlays this quarter.

Some of the key economic forecast assumptions. I’ll remind you, however, that the models do ingest hundreds if not thousands of national regional and MSA level economic data points. So the ones I’m going to give you provide really only a high level insight into the nature of the forecast. But the forecast scenario we chose shows national unemployment increasing to just over 9% by the end of 2020 then trending down and averaging 8.4% through 2021 and continuing to go lower from there. Real GDP declining 4.3% in the aggregate for 2020, and increasing 3.5% in the aggregate for 2021.

The S&P 500 index remaining relatively flat close to 3000 through 2021 and then trending upward with volatility trending down slightly to under 20 through the end of 2021 and a Fed funds rate that basically stays at zero at least into 2023.

The franchise finance portfolio continues to carry the highest reserve level at 4% followed by CRE at 1.6 and C&I at 1.3. The reserve on the residential portfolio did increase this quarter from 19 to 27 basis points. This was related primarily to changes in the economic forecast particularly the unemployment outlook to which that model is extremely sensitive. And some changes in modeling assumptions about loans on forbearance.

Slides 23 through 26 in the deck provide some details about risk rating migration for the quarter. As I think we would expect in this kind of a volatile and evolving environment as more information becomes available about the impact of the pandemic on specific businesses. Our total criticized and classified assets did increase this quarter. There was a net decline in special mentioned loans of $386 million while substandard loans mostly in the substandard accruing category increased by $816 million. The majority of those downgrades were actually migration from special mention to substandard. Not unexpectedly we saw the largest increase in the CRE retail and hotel segments.

In terms of criticized and classified assets, the total increase in CRE and criticized and classified was $276 million, which was $168 million decline in special mention and a $445 million increase in the substandard. And again most of this related to the hotel and retail property types. You can see what went on in the rest of the portfolios on the charts on the slide and I won’t go into those details right now. Nonperforming loans remained relatively flat quarter-over-quarter, totaling $200 million at September 30th.

As expected and as Raj mentioned earlier we saw continued recovery in the fair value mark on the investment portfolio this quarter. If you recall at the end of the first quarter, the portfolio was in a net unrealized loss position of about $250 million that improved to a net unrealized loss of $3 million at June 30th and at September, the portfolio was actually in a net unrealized gain position of $62 million.

The NIM did decline this quarter to $232 million from $239 million. Last quarter we had guided to flat. The main factor that influenced that decline was the deployment of liquidity into the bond portfolio, which while accretive to net interest income on the whole it certainly was not accretive to the NIM. Been in a period of challenging credit environment and muted loan demand, we saw that liquidity deployed into securities, which had a negative impact on the NIM.

The yield on interest earning assets declined by 22 basis points, there was a 10 basis point decline in the yield on loans, and a 48 basis point decline in the yield on investment securities. We had resets of coupon rates on floaters, amortization and prepayment of higher-yielding mortgage-backed securities, and purchase of new securities at lower prevailing rates that all contributed to that decline.

The average rate on debt securities that we purchased this quarter was about $150 million ranging from a low of under 1% for some agency floaters to a little under 2% for some of the private label securities that we bought. Rates on our commercial loan originations this quarter were in the $330 million to $350 million range.

Total cost of deposits declined by 23 basis points quarter-over-quarter with the cost of interest-bearing deposits declining by 26 basis points. Of note the cost of our FHLB and PPPLS borrowings increased by 24 basis point this quarter. The driver of that is simply the advances that were paid off this quarter were the shorter term lower rate advances, a significant portion of the advances remaining on the balance sheet are hedged, and are at a little bit higher rates. Most of these hedges run off over the course of 2021. The sub-debt raise that we did in June also impacted the NIM for the full quarter — in the third quarter.

Just a few high-level comments about non-interest income and non-interest expense that impacted PPNR this quarter. Gain on sale of loans was down as we didn’t really have a lot of SBA loan sales. Our whole SBA machine has been focused on PPP loans for the last couple of quarters.

Lease financing income, as we had guided to previously, has trended downward and we’ll probably continue to do so in the near-term as assets coming off-lease are being re-leased at lower rates. Increase in deposit insurance expense is related directly to the increase in classified assets which impacted our assessment rate.

I want to just mention that we continue to have a robust liquidity situation, we haven’t experienced any liquidity stress since the onset of the pandemic and I think that’s true across the industry.

Now, I’ll shift for a minute to our expectations for the fourth quarter. On the NIM, we expect the NIM to be flat to possibly up a couple of basis points as the cost of deposits will continue to trend down.

The yield on earning assets will also continue to trend down, but we do expect as of right now the NIM to hold at this level even with some expected continued growth in the bond portfolio.

From a balance sheet perspective, as Tom said, we expect a net runoff in loans in the fourth quarter likely some growth in the residential portfolio and we expect loan growth for the year to come in at low single-digits.

Deposit growth is a little harder to predict with precision, but we do expect the growth in both total deposits and non-interest DDA in Q4 with some continued runoff of the time deposit portfolio leading to overall low double-digit deposit growth for the year. And again, we are likely to continue to see some securities growth in Q4 as liquidity is deployed into the bond portfolio.

Expenses, our expectation for the fourth quarter is relatively flat to the third quarter, but we may have an adjustment to variable compensation expense in the fourth quarter just depending on how full year results come in.

The provision, I know you guys wish I could — want me to give you a number and I wish I could. It will depend to a large extent on the economic forecast we’re looking at in December.

Beyond that in the absence of any deterioration in the economic forecast any provisioning in Q4 would relate primarily to any further risk rating migration or changes in specific reserves which could go either way. It’s just too early to predict. But right now I’m not expecting any across the board reserve builds going forward. The tax rate is expected to come down a little bit for Q4 to between 20% and 21%.

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With that, I will turn it over to Raj to make any closing remarks.

Raj Singh

Guys, thank you for bearing with us. We take a long time given so much information we want to put out to you. We’ll open it up for questions and delve into anything you want to get into. Operator, you may take questions.

Question-and-Answer Session

Operator

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

Jared Shaw

Hi, good morning.

Raj Singh

Hey Jared. Good morning.

Jared Shaw

Maybe just sticking with credit — or starting with credit. Leslie heard your comments on provisioning for fourth quarter. But as we look at the loans that you’ve proactively already risk rated down that are still on deferral, as those come off of deferral or you see more of a permanent restructuring happen.

Do you still think that the allowance captures that impact? Is that what you’re talking about in terms of potential additional risk rating migration, or is it really — you’ve already internally risk-rated those the allowance that captures that? And as we see any charge-off or any type of restructuring that there shouldn’t be a big impact to the provision.

Leslie Lunak

Jared it’s hard to dimension that because it’s kind of a loan-by-loan thing. But certainly I think it’s likely in the fourth quarter that — or I don’t want to even say likely. I think it’s possible in the fourth quarter that there could be some additional risk rating migration that could lead to some provisioning in the fourth quarter. But again I wouldn’t expect broad-based reserve building.

This is a very fluid environment and we get new information every day about what’s happening and what’s going on with borrowers’ businesses and how they’re being impacted by current events in the current situation. So it’s a pretty fluid situation.

Jared Shaw

Okay. Thanks for that color. And then just shifting to the deposit side; one, I guess when you look at the growth that you’ve been seeing how much of that is coming from that national deposit group versus sort of blocking and tackling within the footprint. And then as we look forward looking at the interest-bearing deposits how low do you think we can get in terms of what you’re actually paying on time and money market and interest savings or interest checking?

Raj Singh

So it’s very hard for me to say how low can we go? Clearly there is room to run. The fact that we are already in the 40s and as I’ve said in the past I’ll reaffirm the fact that our deposit cost should decline into the middle of next year. So there is a lot of runway for us to take this down. Now that 23 basis points a quarter, but something lower than that.

The — to your first question, I would say the growth in DDA and total deposits deferrals pretty widespread New York, Florida, Nashville everything contributed. So it wasn’t any one place where I can say well that’s where it came in. And that’s been the case for some time now because we focus so much on this across the board. That is coming in from every direction. The only thing that is shrinking really is the retail CD portfolio which we’re doing deliberately.

Jared Shaw

Okay. Thanks. And then just finally for me. Any more specific update on what you’re seeing in the New York City multifamily and retail side. It seems like that’s still being hit harder than the broader national platforms what your thoughts are there in terms of timing for ultimate resolution or strengthen?

Raj Singh

Tom do you want to talk about that?

Tom Cornish

Yes. Yes I would say first, there’s actually three asset classes when you look at that. There’s multifamily only, retail-only and multifamily that’s mixed with retail in it. If you look at our multifamily portfolio today in New York, it’s about $1.2 billion a little over $1.2 billion. We expect to see that continue to decline with fourth quarter maturities, but the overall performance in that portfolio I think is good.

Our portfolio is predominantly in rent-regulated type units. We have a relatively modest exposure to free market and free market is particularly the upper end is where you’re seeing higher level vacancy numbers. So when you look at national headlines about vacancy in the New York multifamily market. They tend to throw out one number and that number is not indicative of all segments and all geographies within the New York market.

So we see that portfolio continuing to decline a little bit probably down another $70 million or so. I’m guessing depending upon what maturities look like. In Q4, the retail component is a little tougher. We are seeing some improving trends in rent collection but I think retail and New York is certainly going to be a challenging place to be for a while until a lot economy starts to move out of it.

We have little exposure in what I would call high street retail which I think is the most difficult part of the retail market. So Madison Avenue, Park Avenue type property is not really our retail exposure it tends to be smaller retail that’s also attached to some of our multifamily exposure. And that’s interesting while those are not per se credit tenants, those are the tenants that are actually working with the asset owners to make payments. We tend to see in the larger segment where you have national retailers those tend to be the ones that are really aggressively pushing nonpayment.

Right now our smaller local tenants are coming up with payment plans and paying two or three times a month and whatnot, but collections are better. So that’s kind of how I would summarize New York multifamily and retail right now.

Jared Shaw

Okay. Thanks a lot.

Operator

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

Steven Alexopoulos

Hey, good morning everyone.

Tom Cornish

Good morning Steve.

Steven Alexopoulos

So I wanted to follow-up on the deposits also. You guys have had really good success in transforming the deposit base, but if we look at the strong deposit growth that’s coming at a time where just about every bank has good strong deposit growth right as customers have sit on more liquidity. Is there any way to tease out from the growth numbers. What’s market share gain success of BKU 2.0 versus just clients sitting on more liquidity?

Raj Singh

Yes. Yes I don’t know how you do that.

Steven Alexopoulos

Maybe a number of accounts or something like that?

Tom Cornish

Yes. So we track new account, new client, new logo is kind of our internal vernacular for that. So one of the things that we see is our new logo generation across all of our business lines is very strong. So while we do see certainly some larger corporate accounts that are sitting on higher degrees of liquidity than they might have before. When we track new logo success across all of our lines of business, it is historically much stronger now than it has ever been before and that’s broad-based in every line of business.

Leslie Lunak

The other thing we do Steven is we do quite a bit of analysis transactional analysis around activity in accounts to try to have a better understanding of what might be excess funds versus operational funds but those numbers aren’t quite ready for prime time.

I’m not at a place where I can make that public. But I also think that largely you’re right there is a lot of liquidity in the system right now. If companies start investing or spending that money it’s going to stay in the system.

So, we’re going to be on the losing into some of that and on the receiving end of some of that. I think the only thing that is really going to pull that liquidity out of the system is the Fed and they haven’t made any noise at this point that they’re thinking about doing that.

Tom Cornish

Yes.

Raj Singh

Yes. Another way Steven to think about this is we look at the payments that are flowing through the bank and they are up very, very strong, not just this year but they’ve been on a very strong growth clip for about three years. So, if it was just the same old guys sparking money because they — everyone has a lot of liquidities the operational metrics when they start to — they’re growing very, very strongly.

We don’t have them because there’s no sort of segue of putting these things out. But we look at them internally because actually believe it or not — there is a flip side to it which is cost. When you have a lot of payments going through, you need more operational support.

So, we’re budgeting right now and it’s a good problem to have. We want a lot of people to use the bank for their wires and ACH and everything else, but also means that we have to keep investing in the operational support needed for that DDA business.

Steven Alexopoulos

Okay, that’s helpful. And Raj as we think about 2021, it seems like the industry is going to struggle with pretax pre-provision growth and I know you said as it relates to BKU 2.0 the low-hanging fruit on the expense side has already been plucked. So, I’m not looking for guidance, but from a high level, do you think there’s enough still to do on the expense side where you guys could see at least some pretax pre-provision growth next year?

Raj Singh

There is. It’s harder to quantify and harder to sort of commit to a timeline. So, for example we — as part of 2.0 one of the things was automation. And we looked at the stuff that we had to automate. There were 15 different functions and we went ahead and automated that. But it shouldn’t stop there. That should be part of our culture. We should constantly be looking at processes and say okay where can I automate more?

Where can we deploy more RPA and it shouldn’t just be a project right? Going forward it should be just part of the discipline. And there’s a lot of stuff that is still manual in the company. Within the easy ones and now we’re getting on to the harder ones.

And we’ll keep doing it and that should be just part of the budget. You take those dollars and you probably invest in sales or in other parts of the company to invest in the long-term.

On the branch side, I do want to take a look at the branch footprint again, but I wanted to wait at least until that is sort of the new normal emerges, right? Right now we’re not in a normal environment. Right now we’re in a weird environment. We don’t know what usage will be and what client expectations will be.

I’m hoping that we get there by first quarter or whatever we get there we take a hard look and say okay now in the new world this is how many clients are going to come in or not come in and we can decide are there another six or 12 branches that we can consolidate.

Steven Alexopoulos

Got it.

Leslie Lunak

The other thing I was talking even about the 2.0 that I think we’ll start to see materialize more in 2021 as some of the revenue pieces. We did launch our commercial card program in August as planned. We haven’t really seen any revenue — appreciable amount of revenue from it yet. Some of the things we’re doing on the fee side will hopefully also contribute to PPNR going into next year.

Steven Alexopoulos

Okay. So, it sounds like you’re sounding fairly optimistic. I mean who knows what growth will actually be but that you’re in a good position to have some incremental revenue initiatives kick in there’s more to do on the expense side. Is that at least fair?

Raj Singh

Yes, I would say so. As much as you can see in this environment yes I would say that.

Steven Alexopoulos

Okay, great. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Stephen Scouten from Piper Sandler. Please go ahead. Your line is open.

Stephen Scouten

Can you hear me now?

Leslie Lunak

Yes. How are you doing?

Stephen Scouten

Okay. Sorry. So, thinking about slide 10 again. Leslie you went through on the migrations of the loan loss reserve. I know it lists here $27.3 million that was due to some of the portfolio risk rating migrations and the specific reserve.

I just wanted to maybe tease that out a little bit and understand how much of that was the movement in the accruing substandard that you guys noted or how much of that might have been related to the one larger charge off?

Leslie Lunak

Almost all of it. Yes. No, the charge-off is — the charge-off reduced the reserve. That had already been provisioned and really didn’t have much effect we did do some additional provisioning around the remaining balance of that loan this quarter. So, that’s part of the $27.3 million. We did provide we have now fully reserved for the portion of that loan we haven’t charged off. So that was part of it in combination with the move to substandard accruing.

Stephen Scouten

Okay. Great. Helpful. And then on your NIM guidance, does that include any expectations around PPP, fee realization? And can you give us some numbers on what you guys have left to realize or maybe what you realized this quarter?

Leslie Lunak

Nothing realized this quarter. We haven’t – I mean other than just amortization but we haven’t – we have not realized any fees upon forgiveness this quarter and we aren’t building any into next quarter. I think there – I think this is really a Q1 2021 event. So our NIM guidance assumes there will be no PPP forgiveness in the fourth quarter. There may be a little bit before we get to the end of the quarter but we’re assuming that will be all for the fourth quarter.

Stephen Scouten

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

Leslie Lunak

Somebody is looking that up. Go ahead.

Stephen Scouten

Okay. Great. And then just last thing on the hotel book. You noted I think two to three properties in New York City or New York open. I’m just wondering if you have any data available on those properties, New York properties in particular around LTVs, occupancy rates anything like that that might give some additional color?

Leslie Lunak

I don’t have that in front of me right now, specifically. But I do know that the occupancy rates are pretty low.

Raj Singh

Yes. These are hotels that have got some different purpose uses to them instead of having business travel coming to them. They’re using them for workers and health care workers and things like that because they’re a broader use hotel concept.

Stephen Scouten

Got it. Got it. And you guys noted that some of the migrations were kind of in hotel and retail. So would it be fair to assume that those are probably encapsulated in some of that increase in the substandard accrue?

Leslie Lunak

Absolutely.

Stephen Scouten

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

Operator

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

Brady Gailey

Hey, thanks. Good morning, guys.

Raj Singh

Good morning.

Tom Cornish

Good morning.

Brady Gailey

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

Leslie Lunak

I think in the fourth quarter we’ll probably see some additional growth in the bond portfolio, because I think we’re still going to be in this situation where we have liquidity that we’re unable to deploy into the loan portfolio. I’m not really comfortable yet predicting beyond one quarter in advance with respect to what the world is going to look like.

But the duration of the bond portfolio is very low. It turns over cash flows pretty quickly. So I wouldn’t view that as a permanent situation. I would view that as a temporary situation. Ultimately that will be redeployed back into the loan portfolio.

Brady Gailey

Okay. All right. And then you mentioned the $1.5 billion of CDs at I think around 170 basis that will be rolling over. What’s the new CD rate that you’re offering? How much savings do you think you’ll be able to get there?

Leslie Lunak

We’re currently offering right around 50 basis points.

Brady Gailey

Okay. And then finally for me just any additional color on the C&I relationship that got I think is about a $20 million charge-off this quarter?

Raj Singh

It’s in litigation and I think it will be a while before get resolved. But like Leslie said, we fully reserve for it. We’ve taken a pretty aggressive charge-off but it will be a long drawn-out litigation.

Brady Gailey

What type of C&I loan was it Raj?

Raj Singh

It was a wholesaler distributor. We had the relationship for a very long time but it’s not accelerating last year. And we were working with the clients and we were collecting $1 million a month was coming in nicely. But under the fire of COVID, I think it turned from a credit loss to something worse.

Brady Gailey

All right. Great. Thanks for the color, guys.

Leslie Lunak

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

Operator

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

Ken Zerbe

Thanks, Leslie in terms of your reserves how would – how would no additional federal stimulus affect your reserve balances. Is that priced in?

Leslie Lunak

So, it would run through in the form of changes in the economic forecast that we’re using. There is some as I understand it. We use primarily Moody’s forecast and they had factored in some assumption of some additional stimulus. So to the extent what they had already factored in was off either to the negative or the positive, it would impact it.

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If we end up with more stimulus than they’re assuming, obviously it will have a positive impact on the economic forecast. And if nothing gets done, which I don’t think is likely but that’s just my opinion. If nothing gets done, it will have a negative impact but it will come in through the economic forecast, Ken.

Ken Zerbe

Got it. Okay. So it sounds like something is in there and we need to get it also might be a bit of a negative. Okay. And then similar question if this third wave of COVID cases that we’re experiencing continues to get worse, do you feel that Moody’s is accurately accounting for that in their forecast?

Leslie Lunak

I mean, it’s my opinion that they’re doing a pretty good job. They’ve got some pretty robust assumptions built into their forecast around the progression of the virus and expected case counts and expected impact. But just like the rest of us they’re estimating. I don’t want to use the word guessing because I think they’re hopefully smarter than I am. But when it comes to that sort of thing, but they certainly are modeling it and building it in. Obviously there’s uncertainty around that. So their estimates and their expectations around that could be off in either direction, but they certainly are making a very concerted effort to encompass those factors in their forecast.

Ken Zerbe

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

Leslie Lunak

There are residential loans that we buyout of — defaulted residential loans that we buy out of Ginnie Mae securitizations is what they are Ken.

Ken Zerbe

Got it. Okay, great. Thanks so much.

Operator

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

Brody Preston

Good Morning, everyone.

Tom Cornish

Good morning, Brody.

Brody Preston

I just wanted to ask real quick, Leslie, you mentioned the hedges. I just wanted to better understand. Do you have sort of a timeline as to when those hedges run off and then the underlying borrowings will those stick around or do those run off as well?

Leslie Lunak

So the hedges run off, the vast majority of the hedges run off over the course of 2021 relatively evenly over the year. And I think there’s close to $3 billion of notional of those on the balance sheet right now. As to whether the borrowings stick around or not, certainly they’ll reprice down if they do as to whether they do or not it will depend on what our liquidity position is at that time and what our needs are.

Brody Preston

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

Leslie Lunak

That’s correct. But they’re hedged. So effectively we’ve converted them synthetically into fixed rate borrowings, which is why the rate item isn’t coming down.

Brody Preston

Right. Right. I was just thinking about when they do reprice.

Leslie Lunak

Yeah. Over the course of 2021 and they should come down materially. And like I said whether they stick around will depend on our liquidity position and whether we have a need for them.

Brody Preston

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

Tom Cornish

It’s — that’s a hard one to make a blanket statement on. We have 180 some odd stores within that one concept in the price sensitive [ph] area as where other exposure is. We have a similar numbers. So they’re all at different phases depending upon when they open up depending upon where those are. These are all relatively for the most part smaller businesses.

I would say we had some conversations with a number of franchisees this week as well as franchisors in the space. And in general I would say, we’re seeing attendance moving up in some places stronger, in some places more gradual where we saw initial decline [ph] in membership. We’re now starting to see generally upward trends and memberships coming back, not 100% in every store. But if you step back and looked at all 300 or so stores that we have in general, I would say the membership and utilization trends are starting to improve over the last couple of months. And the overall portfolio is in a better position today particularly in the last 90 days than they may have been in the previous 90 days. And now we’re down to only really a couple of states that have not opened up the stores.

Brody Preston

Okay. All right. Thank you for that. And then I know it’s a smaller portion of the CRE book. But just wanted to know what you all are seeing in the New York City mixed-use portfolio. Has that improved at all in the last few months, or is it still a tough operating environment?

Tom Cornish

Yes. What you see in that — in those loans is these are typically smaller walk up apartment over store. You generally see the performance in the apartment percentage of it. By particularly that a rent regulated unit, which most of them are — these smaller units tend to have three or four stores, five stores maybe max on the ground floor. You’re seeing vacancy in some of those store units. I think that you’re going to be looking at longer term vacancies to come up them. There are certainly efforts to re-lease property, but right now new tenants are up to come by in the smaller New York retail loans.

So the residential if you will part of those loans is performing well. But the relationship that the retail has to the overall cash flow stream is larger than it might be if it were a 15 storey multifamily project with 150 units versus 20 or 25 units. So there — I think, it’s going to be until the New York market starts to recover a little bit more on a retail perspective until some of those turnarounds.

Brody Preston

And, I guess, on average what percentage of the rent roll is made up by the, I guess, the retail portion of the mixed use?

Tom Cornish

Yes. I don’t think we have that right here. It would, obviously, vary from property to property.

Brody Preston

Yes.

Leslie Lunak

There is some information in the slide deck, it’s not percentage of the rent roll, but it does at least give you the total dollar amount of loans that are those mixed use properties. But I don’t have the rental info.

Tom Cornish

Yes. Just sort of — this is more of an impression from ducking for property owners. I would say, obviously, it has to be more than 51%, is based on the residential component for to be both in the multifamily portfolio. I would say, in most of the smaller properties you’re probably looking at a 65-35 blend maybe 70-30.

But at the historic debt service coverage ratios per property in these segments, because of the cap rates and values in New York have normally been in the 1.20 to 1.30 range. So a loss of a couple of tenants is impactful to the overall cash flow of the property. The amount in the total mixed-use portfolio of $284 million.

Brody Preston

Yes. Yes. I saw that in the deck. Thank you for that. And then, last one for me, real quick. Leslie, I know you talked sort of ad nauseam about the reserve here, but just wanted to think about — just wanted to — just quickly kind of think about the mix between the qualitative overlays and then the specific migration. I guess, just when I think about the CECL model and the economic forecast. I guess, I just would have — I would have thought that some level of migration would have been built into it.

And so, I guess, how should we view the $27 million you reserve for the migration? Is it is it more than what the model would have baked in already, or should I be thinking about it more in terms of a mix between we’re actually seeing some quantitative migrations, so that will increase and then the qualitative factors will come down?

Leslie Lunak

I think it’s mostly the latter. We’ll see the qualitative factors come down and the quantitative portion increase. The model does have some of that baked in. But the model only knows what we can tell it in – we’re in a very fluid environment and where the model is taking something and saying, okay, if this happens to the economy, we predict this will happen to these borrowers. There’s just facts that the model doesn’t know about individual borrowers and we feed those facts to the models as they become known to us. So we try to capture that qualitatively until we can get it into the model.

So you will see qualitative come down and the quantitative — either disappear altogether, as things get rosy, or be moved into the quantitative portion, but we did choose this quarter to hang on to some of those qualitative reserves rather than releasing more of them, simply because we’re still faced with what I think is a pretty volatile environment and a pretty high level of uncertainty and we weren’t quite comfortable pulling all that off.

Brody Preston

Okay, great. Thank you very much for taking the time. Thank you.

Leslie Lunak

I also want to quickly correct the statement I made before about the roll off of those hedges. Probably a $2 billion of those hedges are going to roll off in 2021 and then a little bit more of it will stick around beyond that. So I misspoke and I just wanted to correct that statement.

Brody Preston

Okay, great. Thank you for the clarification.

Leslie Lunak

Yes.

Operator

Thank you. Our next question comes from the line of Christopher Marinac from Janney Montgomery. Please go ahead.

Christopher Marinac

Thanks. Good morning. Raj and Leslie, if I heard you correctly on the criticized and classified know numbers; it looks like the ratio to capital reserves is up from June to September. Should it peak here? And should we be more focused on the classified than the total criticized piece?

Raj Singh

Go ahead, Leslie.

Leslie Lunak

Okay. I wish I knew the answer to that question with — and could give you a definitive answer about what risk rating migration may or may not look like in the fourth quarter. I don’t think it’s outside the range of possibility that we will see additional migration, particularly into that substandard accruing bucket in the fourth quarter. We may not. Certainly, if we knew about it, we did it already. But in this kind of an environment with some of the uncertainty and volatility that remains out there, I don’t think I would be comfortable saying definitively that we’re done there.

Raj Singh

Yes. And even this quarter, if you see — you’re seeing net numbers, then there were movements on both sides. You’ve had things actually improve and go back into the past category. But then you have net migration in the wrong direction, it is such a flow environment to try and predict that when we do this exercise again in December, what will be the health, well, the liquidity the revenue picture, the leverage picture of our clients, it’s just very difficult to do that compared to when we did this exercise in September.

So we generally do it late in the quarter to try and capture as much as we can, what has happened and try and give it as the recent picture as possible. But it’s difficult. And I fully expect some to get better and some to get worse. Where will the net number be. It is very hard to tell.

Christopher Marinac

No. I appreciate the color. And again the reserve build that you’re doing really reflects the loss content. So perhaps that’s the point at the end of the day.

Raj Singh

Yeah.

Christopher Marinac

Great. Thanks for all the information this morning.

Raj Singh

Thank you.

Operator

Thank you. Our next question comes from the line of Steven Duong from RBC Capital Markets. Please go ahead.

Steven Duong

Hi, good morning guys.

Raj Singh

Good morning.

Steven Duong

On your CET1, it showed a good uptick this quarter. And I know it’s early, but as things start to unfold next year and if losses end up being low or delayed, is there a capital level where buybacks become more attractive for deployment for you guys?

Raj Singh

I think buybacks are always an important tool to manage capital. It’s just that you can’t really use that tool in an environment like the one that we’re in today. I’m hoping that’s a different story three or four months down the road. But I don’t think in the next couple of months things will change.

Steven Duong

Got it. And then just following up on the borrowing Lesley. As the hedges roll off the $2 billion next year, is it fair to see the borrowings costs tick down every quarter next year?

Leslie Lunak

Yes. I don’t have in front of me exactly how much of it rolls off each quarter. But yes that’s fair. I can’t say it will be even quarter-over-quarter, and we’ll try when we put our guidance for 2021 out in January to maybe be a little more specific about where we expect that to land. But that is fair, yes.

Steven Duong

All right, perfect. That’s it for me. Thanks for the color.

Operator

Thank you. Our next question comes from the line of Ebrahim Poonawala from Bank of America Securities. Please go ahead.

Ebrahim Poonawala

Good morning. I’m sorry if I missed this Leslie, but just wanted to follow-up in terms of the margin outlook. X sort of the PPP, x some of the hedges. When we look at the margin today at 2.3%, big picture do you think we’re getting to a point of stability and I guess tied to that? And maybe Raj if you want to add to this talk to us around what you think the bank can now from a return on equity perspective as we look into 2021 and beyond assuming there’s no big change in the interest rate backdrop?

Raj Singh

Yeah. So I think you did miss Leslie’s comment. Again trying to predict for too long is very dangerous business. But at least for the next quarter, we feel that margin should be pretty stable. It might even be up a bit as one or two.

So stability in the margin given everything that we’re doing on the deposit side we continue to do that despite pressure on the asset side. So where that solves for today in a more normalized environment would be a 9%, 10% return on equity that’s the environment we’re in with rates at zero, and margin pressure being what it is. I mean, our margin has been in the mid-twos. If it wasn’t for the environment that we find ourselves in we were on track to actually improve our margin. We haven’t improved it but we — our margin hasn’t been crushed like a lot of banks have who are fairly asset sensitive.

So we are down a little bit from where we were six months nine months ago. But we’re holding our own. And given the rate environment if it stays like this forever and ever, that’s sort of where the margin will be. And ROE should fall to 9% 10% range, it’s hard to take it at to 12%.

Ebrahim Poonawala

And do you think that like coming into the downturn, the margin and just the funding mix played a role in terms of the gap in your ROE or ROT versus the group. Do you think as you come out you expect the bank to be in line or better than peers from an ROE perspective?

Raj Singh

Yes. I mean the difference — whenever we come out of this environment rates right is that what you’re asking Ebrahim?

Ebrahim Poonawala

I mean again I think if rates rise or if we remain in this low for longer, do you expect that in both those scenarios BKU should outperform or be better than peers?

Raj Singh

I think so. When rates rise, I’m expecting our — the way our margin behaves to be very different this time around than when it rates rose last time around because the deposit date is quite different already than let’s say three years ago when rates started rising.

And part of also why our margin is what it is it’s also our asset mix. We’ve been very careful for the asset mix. We have not taken a lot of risk. And that’s why on a credit perspective we feel much better than a lot of our peers do at this time. So yes, but I’m being realistic in terms of when do we expect rates to go up again. I’m not expecting that anytime. So that’s the tough part of where we are. The slope of the curve is nice. But overall rate is just so low that the margin pressure on the industry is going to be with us for a while.

Ebrahim Poonawala

Got it. Thanks for taking my question.

Operator

Thank you. I show no further questions in the queue. At this time I’d like to turn the call over to Raj Singh, Chairman and President and CEO for closing remarks.

Raj Singh

Thank you so much everyone for joining us, giving us your time listening to our story. Like I said at the beginning of the call I hope that 90 days from now when we speak to you again that, we don’t have another deja vu moment and we won’t be talking about the virus again.

But — we will be in a better place. But having said that, I do want to say, despite all the noise you hear on the television. Overall the economy has improved quarter-over-quarter and we’re thankful for that and we’re all benefiting from it. And hopefully it gets even better as we went down the road. But again, thanks very much if you have any detailed questions you know how to reach Leslie or myself. Thank you. Talk to you in three months. Bye.

Operator

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



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