BankUnited, Inc. (BKU) Q4 2021 Earnings Report, Transcript and Summary

00:07 Good day and thank you for standing by. Welcome to the BankUnited 2021 Fourth Quarter and Fiscal Year Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] 00:37 I would now like to hand the conference over to your speaker today, Ms. Susan Greenfield, Corporate Secretary of BankUnited. Ms. Greenfield, the floor is yours.

00:46 Thank you, Chris. Good morning, and thank you for joining us today on our fourth quarter and fiscal year 2021 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. 01:05 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. 01:21 Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates or expectations contemplated by the company will be achieved. 01:45 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 the COVID-19 pandemic. 02:05 The company does not undertake any obligation to publicly update or review any forward-looking statements whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company's Annual Report on Form 10-K for the year ended December 31, 2020 and any subsequent quarterly report on Form 10-Q, our current report on Form 8-K, which are available at the SEC's website, www.sec.gov. 02:43 With that, I'd like to turn the call over to Raj.

02:45 Thank you, Susan. Welcome, everyone. Thanks for giving us your time to listen to our earnings. Yesterday, somebody asked me, how would you summarize in 30 seconds unless, unless far good we’re doing that. If I was to summarize last quarter's results. I'd say $1 billion of loan growth, these are round numbers. We’re going to the exact numbers. $1 billion of loan growth, $1 billion of deposit growth, a 11 basis point expansion in margin and improving credit trends, pretty much across the board, earnings per share of $1.41. So good increase in book value as well. So this was obviously a very good quarter for us, quarter we've been waiting for some time. 03:26 We told you at the beginning of last year that we expect loan growth to come back in the second half of the year. It took a little bit longer, but it seems to be here now and we're very happy with what we've done on the left side of the balance sheet. There are a number of notable items this quarter. So, I'm not going to go through them. I would have Leslie go through them in her comments. But what I’ve asked is, for Tom and Leslie and myself will go a little bit faster than we usually do, because there's a lot to cover today. 3:59 So quickly jumping into it. We had $1 billion of loan growth. This is excluding PPP, of course, and think about where we were first quarter, we had a reduction of $500 million in loan, second quarter, we were down just a little bit. Second -- third quarter, we were up a little bit, and now, fourth quarter, we're up very nicely $1 billion. So, the momentum is right. Loan demand, we're seeing that come back across industries and across geography. So very broad based and Tom will get into the details of that. 04:29 Income came in at -- net income came in at $125 million, or $1.41 a share, this compared to $87 million or $0.94 last quarter. ROE for the year came in at 13.3%, ROA for $1.16. Net interest income increased by $11 million compared to last quarter. So, very happy about that. Margin expanded from 2.33% to 2.44%. Cost of deposits keeps going down. It didn't go down as much and Leslie will get into that, but we expect it to go down again more this quarter in the first quarter. 05:06 Cost of deposits was 19 basis points for the quarter, previous quarter was 20 basis points. We ended the year on December 31 on Spot was -- cost of funds was 16 basis points so we’re -- January 1, we're starting at 16 and hopefully, we'll be able to take it down more. I think at some point, the cost of deposits will eventually inflect. I'm not sure if it's the first quarter or the second quarter, but we're getting close to the bottom, as the rate environment is a lot of change. 05:35 Deposits grew $1.3 billion for the quarter, average non-interest DDA grew $418 million though period and declined $183 milion, which is a lot of movement that we saw in the last quarter. Some of that in the last week of the quarter, some of that has reversed itself in the first-two weeks, but that's just usual activity that we see. Credit metrics continue to improve like I said, criticized classified came down again nicely by $367 million, as did loans that are on deferral or modified under the CARES Act, they're beginning to look very small now. 06:12 NPL ratio was down to 87 basis points from 121 basis points last quarter. If you exclude the guaranteed portion of the SBA loans, it was at 68 basis points. NPA ratio was down to 58 basis points from 80 basis points. The charge-offs for last year came in at 29 basis points compared to the prior year, which were at 26 basis points. On the buyback, we told you that we would be opportunistic as and when we see weakness in the stock price, which is exactly what we did last quarter. We bought back $182 million of stock, it still leaves about $27 million in our authorization. But when that is completed, we expect to go back to the Board for more because we are sitting on a lot of excess capital. 07:01 Book value per share is now $35.47 and tangible is at $34.56, so come a long way in the last few years. The macro-environment in our markets, listen, I really can't ask for anything better. The one last thing that I was asking for is loan demand to come back and that's also back. Line usage is up, just our people are busier than they have been since before the pandemic, which is a really good sign. Also rate environment is going to change and that should also marginally help banks as its rates normalize. 07:41 And overall, the economy, if you measure it through unemployment, whether you measure it through collateral values, it's just, there is a lot of good news around. Challenges, there are still some challenges, obviously. We are going through another wave of Omicron. I'm not sure how many letters are left in the Greek alphabet, but it's something we still have to pay attention to. I don't think it's really had much of an economic impact, but we just need to be aware that we are still in the middle of a pandemic. It did push back our plans for getting employees back into the office yet again. So that's number one. 08:22 Supply chain issues are still real, inflation headwinds are still there, and labor market is tight, things that everyone knows, I'm not saying anything earth-shattering and competition is still intense. But overall, we're feeling very optimistic, where we stand at the beginning of this year. 08:41 Strategy, for us, looking forward into 2022 and even beyond. Our ambition is to build a commercial bank and keep building a commercial bank. Last couple of years have been a bit of a curveball and I see us basically returning to what we were doing before the pandemic, which is continuing to grow our commercial business. 09:03 We have -- in the last few years, you could look at our balance sheet and say, it has gotten much lazier in terms of the spreads of assets that are on. I think that's true for every bank. If you see what has happened with the securities build-up and jumbo residential build-up, and I think going forward this year and into next year, the strategy is to basically go back and invest and grow higher spread business, which is the commercial business and deplete down the lower spread business like in the securities portfolio. 09:39 So we have talked to you a little bit in -- cryptically about expansion into markets. I will tell you what those markets are, one, will not surprise anyone, which is Atlanta. We had attempted to do that just before the pandemic and have really bad timing, but we are convinced that is a good market for us and we are really doubling our efforts and instead of doing it on a piecemeal basis, we're going to do it holistically with C&I, CRE treasury management, the whole suite of sales seen in Atlanta. So that is in the works and we should be operational, hopefully in the next quarter or so. 10:22 The other location is, we will need a little bit of explanation, so bear with me, it's actually Dallas. And why Dallas? It's not contiguous, it's far away, it's a competitive market. Well, the reason is, we -- as you know, we already do a lot of business nationally, especially in the deposit side and we've had a lot of success over the last three or four years in Texas. And we have round numbers of about $0.5 billion of deposits from clients in Texas. 10:52 We are reaching that place where we cannot grow that business without presence on the ground. So, we have to invest with some people in the branch. I don't expect it to be more than the branch, at least not in the medium-term -- short to medium-term. Just one branch and a few people will do, but we can then serve, not only the existing clients, but we could grow that book. We can easily double that business in a very short period of time. So, we're very bullish on that because we have already know the pipeline is there and just converting that it's getting harder from far away. So those are the two markets. 11:23 Texas is at least initially, not going to be so much about lending, other than the lending we already do in Texas through our national businesses, but over time, I think that will open up other opportunities on the asset side as well, but we're going to start with the deposits side. There is another short announcement. In the coming weeks, you'll also see announcements from us on overdraft policies. We look at our overdraft policies, they're already very, very customer-friendly. We really don't -- that's not how we make a living and we're basically walking towards this, eliminating consumer overdraft. It's a rounding error for us. We already are a very customer-friendly bank. So why not just do this and it's not going to have any material impact to the bottom line. 12:18 Quickly, guidance for next year. We expect basically loan growth to come in single -- mid to high-single digits, more coming out of the commercial side and less or maybe not even any from the residential side. Certainly, I think from loan and security, probably shrinking that now. The idea is not to drive this by just growing the balance sheet or by improving the mix of the balance sheet. And then keeping capital free for continued buybacks, we’ve done quite a bit last quarter – in last year and there is no reason why we wouldn't do, at least as much this year, not more. 13:01 Deposit growth, while that's always a focus, it's not the number one priority. That's not going to drive earnings and we'll continue to stay focused on growing demand deposits, but really our attention is on the asset side. NIM is expected to -- we don't make bets on interest rates. We said that hundreds of times. We try to stay neutral and active. We are minldly asset-sensitive at this point in time. So as rates rise in the middle of the year and onwards, we expect some health of that to our margin. 13:40 Expenses, it is a tough expense environment, given the -- what we're seeing in the labor market. We expect expenses to be also mid to high-single digits and PPNR is expected to grow next year. 13:55 So with that, Leslie, I don't know if I'm missing anything. If I did, I will come back to it, but Tom, I'll pass the microphone to you.

14:04 Great. Thanks, Raj. So as Raj said, for the quarter, excluding PPP loans, we grow by over $1 billion. It's the largest loan growth we've had in several years. So, we were very excited about that. We see a lot of positive trends. If you break it down, total commercial loans grew by $500 million, while the residential segment grew by $541 million and $110 million of that $541 million was within the EBO segment. So, on the commercial side, the largest increase was in our C&I businesses, which grew by $566 million for the quarter, $556 million, sorry. 14:47 I think the thing that's the best about that was not only was it a significant amount of growth, obviously, but it was very broad. If you look at the supplemental information in the deck, you can see it's across a number of industry segments. So we have been talking about strong pipeline in the last earnings call that we did and we really saw it come to fruition in this particular quarter. So that was extremely encouraging. 15:14 Mortgage warehouse balances grew by $215 million and utilization was up to 56% in that area. Commitments were up over $200 million for the quarter to approximately $2 billion, continued growth in commitments is expected for 2022. CRE area declined this quarter by $181 million. I would point out that two-thirds of that decline was in some of the weaker asset classes that we see, which was retail and hospitality. 15:49 And even within retail and hospitality, the two classes that declined the most were unanchored -- non-anchored retail and independent hotel chain. So those are parts of that asset class that were not putting any emphasis on and we'd like to see increase in exposure to. So generally, we were happy to see that. Most of the other asset classes within CRE were down slightly, but relatively flat. We do expect mid to high-single digit growth in both the CRE and the C&I segments for the year. 16:26 Franchise portfolio declined in the fourth quarter, as did equipment finance and clinical portfolios. For ‘22, we expect franchise to continue to decline a bit, although we will lend into selected concepts. Growth is expected to resume in both the equipment finance and clinical portfolios in 2022. 16:48 Utilization, we continue to see positive trends in that area. So, as Raj mentioned, we're seeing growth in the economic scenarios in the markets that we do business in, especially from a C&I perspective, all segments grew, all markets grew. We had a particularly good quarter in New York in the C&I segment. So I think all of that is very encouraging. 17:14 The operating lease portfolio was down $19 million in this quarter and is expected to be flat to down slightly in 2022 as we continue to deemphasize our exposure in the equipment finance area, especially in the energy area and shift more to equipment leasing product within our end-market clients. 17:34 Just a quick update on deferrals and CARES Act modifications. On commercial, a total of $172 million in commercial loans were made on modified terms under the CARES Act, compared to $244 million at September the 30th. All of the commercial loans that have rolled off modification to date of either have been paid off or resume regular payments. 17:57 On the residential side, excluding the Ginnie Mae early buyout portfolio, $33 million of loans remained on short-term deferral or had been modified under longer term CARES Act repayment plan as of December the 31st. 0.96% of the residential loans have rolled off, 96% of the residential loans have rolled off, deferral or modification have resumed regular payments at this time. 18:20 Just a closing comment on NI-DDA, as Raj said, we did have some fluctuation in larger accounts at the end of the quarter, but we still see strong core DDA growth across all of our kind of core banking teams and if you look at the total year, we grew NI-DDA by 28% for the year and if you look at the shift in composition, we ended the previous year at 25.4%, we ended this year at 30.5%. So very substantial shift in composition and increase in NI-DDA overall for the total year. 18:58 So with that, I'll turn it over to Leslie for some more detail on quarter.

19:00 Thanks, Tom. I'll start with the margin. The margin increased to 2.44% this quarter from 2.33% for the third quarter. The yield on loans increased to 3.50% from 3.45% last quarter. It really wasn't one -- any one thing that drove that, a lot of different factors contributed to that increase. 19:22 The yield on securities increased to 1.54% from 1.49% last quarter and the main factor leading to that increase was slower prepayment speeds on securities purchased at a premium, you might recall, we've been kind of getting beat up -- the securities yield has been kind of getting beat up by accelerating prepayments lately and that seems to have come to an end. So that's good news. Duration of the portfolio is still short at about 1.5. 19:48 Total cost of deposits declined by 1 basis point quarter-over-quarter and the cost of interest-bearing deposits declined by 2 basis points. One point I want to make here is that we have, in anticipation of a rising rate environment, extended some duration within the deposit portfolio by issuing some callable CDs. So that is kind of moving that number in the opposite direction a little bit. 20:11 We terminated some outstanding cash flow hedges this quarter with a notional amount of $401 million and a weighted average rate of 3.24%. And this along with the maturity of some of the other higher rate hedged advances reduced the average cost of FHLB borrowings from 2.35% to 1.86%. We took a loss of $44.8 million on the discontinuance of those hedges and we were able to terminate all of the hedges that had pay rates over 3%. So that should be a tailwind to the NIM going forward. 20:45 For next year, as Raj said, we do expect the NIM to increase. That increase will be more back end loaded because obviously, in rising rates are one of the things that's going to drive that increasing NIM. With respect to the provision and the reserve. The provision was $246,000, so pretty much zero this quarter. 21:06 Slides 10 through 13 of our deck provides you with some further details on the reserve. The reserve declined from 70 basis points of loans at September 30 to 53 basis points at December 31. The main reason for the decrease in the reserve, frankly, was charge-offs that we took during the quarter. 21:22 We had net charge-offs of $34.2 million and I think $24 million, a big chunk of that was related to this one commercial loan that we've been talking to you guys about for several quarters now. So that should have been something you were expecting to see. The vast majority of those charge-offs were reserved for at the beginning of the quarter. I think $33 million of the $34 million, so that led to the decline in the reserve this quarter. 21:48 Other things that -- offsetting factors that impacted the provision for the fourth quarter were a $13 million decrease related to improvement in the economy. So, our models were telling us really, we should have had another $13 million decline in the reserve. We weren't quite comfortable with that, with the Omicron variant floating around out there and some uncertainty remaining around fiscal and monetary policy. So we did add a qualitative overlay to the reserve to offset that and so the qualitative overlay went up by $15.6 million this quarter. 22:23 As to risk rating migration and charge-offs, and again, details are in the deck on slides 25 through 27. Total criticized and classified commercial loans declined by $367 million this quarter for a total decline of $1.2 billion for the year 2021. Total non-performing loans decreased by $71 million to $206 million this quarter from $277 million at September 30th, $34 million of that reduction was the charge-offs that I referenced previously. 22:55 Looking in at -- looking at other income and expense for the quarter and I know there's a lot of noise in there, and I'll try to walk you through some of that. In the fourth quarter, we recognized a gain of $18.2 million on the sale of a portfolio of formerly covered loans. That sale was related to a tax planning strategy that was the reason we sold those loans. 23:18 Otherwise, with respect to non-interest income, we continue to see a steady increase in deposit service charges, and we do expect non-interest income to be up probably mid to high-single digits for 2022. 23:32 On the expense side, I just talked about a $44.8 million charge related to the discontinuance of some cash flow hedges. Also, in December, we paid a special bonus to our employees of $6.8 million. Raj, if you want to elaborate on that a little bit?

23:49 Yeah. There is one item I do want to talk about is that we saw all of this happening in the quarter. We saw the big tax refund from the state, which we have fought many, many years for sort of once in a blue moon type of a thing. And I looked at what -- the team has done over the last two years through COVID. We have not done anything like hazard fee, or anything like that for anyone. But at that time, I thought that sharing a small portion of this is a very wise long-term investment in our people and we decided to do a $5,000 bonus for every employee in the company. 24:35 Its usually bonuses are performance driven and people who make more money get bigger bonuses and so on. This is not that. This is basically everyone got $5,000, whether you're a teller making entry level salary or you running a big business, you've got $5,000. I cannot tell you the amount of goodwill in the company earned through the $7 million investment. And I know this will provide a return, which is hard to measure over the many, many years to come. People will remember this. It just changed the dialog in the company and it just so happened, it was in the fourth quarter and it was close to the holidays. So if the timing worked out well. 25:22 And the feedback that I've gotten, it's just, I'm glad we could do this and we have the earnings or the one-time earnings to be able to fund this through. So that's really what the thinking was. Everyone got $5,000.

25:40 Okay. So on that happy note. We also recorded $4.2 million in professional fees in the fourth quarter that related to the Florida tax settlement and we took a $2.8 million impairment charge on some of the older sand cars in our railcar fleet, where projected future cash flows had come down some. So all of those notable expense items totaled $58.7 million pre-tax for the quarter. 26:10 Aside from that, I am sure you noticed the compensation expense, even taking into account that $7 million special bonus was elevated this quarter that was really due to adjustments that we made in the fourth quarter to our variable compensation accruals we had a really strong growth quarter which led to some increase in our incentive accruals and the strong year that we had, we decided to up our discretionary bonus pool as well. We think that's something that we're happy. We're in a position to be able to do that for our employees. And so, those two things totaled another $4.6 million. 26:42 Income taxes, I think we've talked enough about the Florida tax settlement, net benefit of $43.9 million, you're all aware of that and related to that, we released some reserves for uncertain tax positions, resulting in additional tax benefit of $25.2 million. This really related to exploration of the federal statute of limitations and some state statutes well around some tax positions we took when the tax rate was reduced from 35% to 21%. 27:12 Even after considering those items, the ETR for the quarter is little bit low. And that's really a result of return to -- normal return to provision adjustments. For next year, I would expect the ETR, excluding discrete items, which always happen but are hard to predict, to be about 25%. 27:31 And with that, I will turn it over to Raj for any closing comments he want make.

27:36 I know there's a lot in here, but let's us get to the Q&A directly. Let's give it as much time as we can.

27:46 Thank you, sir. [Operator Instructions] And our first question comes from Brady Gailey of KBW. Your line is open.

28:09 Hey. Great. Thanks. This is Will Jones on for Brady Gailey. How are you guys?

28:11 Hey. Good, Will. Nice to hear from you.

28:14 Good morning.

28:15 Hey. Great. So I just wanted to start on credit. I know net charge-offs were up a little bit. This morning, you guys alluded to -- it being related to that one particular equipment distributor loan where all the charge-offs this quarter specifically to that one credit?

28:31 No. Well, that was about $24 million of the $34 million. But aside from that, I don't think it was particularly unusual level of charge-offs, but that $24 million of the $34 million was that one.

28:47 Got you. That does make sense. So, I know you guys still have a pretty decent slug of that credit remaining as NPL. I guess --

28:55 Yeah. It was $27 million left on the balance sheet, Will, and there's an $8 million reserve sitting against that. And we feel very comfortable with that $8 million reserve is adequate. So -- and net charge-offs, the rest of that $8 million in charge-offs will come over the next couple of quarters at some point, I would imagine.

29:12 Okay. Great. Yeah. You beat me to it. That's very helpful. Thanks. And then -- and just thinking about the reserve, you guys now have a reserve, you exclude PPP loans in the mortgage warehouse. We have that about 56 basis points, which does screen on the lower end of your peer range. I'm just curious your thoughts on how comfortable you are with the reserve at these levels. And then just taken a step further, how you would think about forward provisioning, we can continue to see this as nice loan growth?

29:45 Yeah. So how comfortable I am with the reserve? I'm very comfortable with reserve, Will. Otherwise, it would be a different number. But yeah, I'm very comfortable with the reserve. It's a good question, and I expected it to be asked. We spent a lot of time looking at reserve levels, particularly compared back to our CECL Day 1 adoption levels. This is a little lower. But there are some good reasons for that. On the residential side, more of the portfolio is the Ginnie Mae EBO segment, which carries a zero reserve. And that Day 1 adoption, only 11% of the resi portfolio with the EBOs, it's now 23%. 30:20 Also on the residential side, we've seen an 18% plus increase in HPI in 2021 alone, and that is forecasted to continue to improve. So that's really brought the LGDs down on the residential side. And we also have a better unemployment forecast than we had on Day 1. In the CRE and C&I space, one of the big drivers is frankly that the weighted average life of the portfolio is a lot shorter now than it was two years ago. There hasn't been as much commercial production. Unfortunately, the last two years as we would have hoped, but that's what the weighted average life of those portfolios down. And the weighted average life is a big factor under CECL in determining the amount of the reserve. We also have a better commercial property forecast, impacting the CRE reserve. 31:07 And on the C&I side, our borrower financial statement spreads have actually -- in the past portfolio, have actually improved considerably since Day 1 adoption. And by the way, the reduction in the reserve -- the specific reserves are about the same. The reserve on criticized classified assets on a percentage basis is higher than Day 1, what's bringing down the reserve is the loss rates on the past portfolio. And those are really the reasons that those past portfolio rates are coming down, more EBOs, better borrower financial spreads, better economic forecast, better property value. So that kind of sums it up. We can tell from my answer, we spent a lot of time digging into this.

31:44 And let's say, we also -- we did end up putting a qualitative --

31:51 Yeah. Like I spoke to that. Yeah. I spoke to that in my comment for us that we put a $15 million qualitative reserve on, our models would have suggested the reserve should be another $13 million lower than it is.

32:03 Got you. Okay. Yeah. Very helpful. Now you guys – you’re obviously prepared for that one. And then --

32:09 I knew it would come.

32:11 Yeah. Lastly, for me guys, really, really nice quarter on the buyback. And it was obviously a really cheap cost. The stock is still trading at a similar level today as it was where you guys bought back shares. Any reason to think buybacks slow from here?

32:26 I will say what I've been saying for the last year on buyback. This is still a very volatile time in the stock market. For no reason, stock can go up and down 10%. And we will continue to use the volatility to our advantage. So we will be opportunistic, to be aggressive, and we think the stock is unnecessarily beaten up and back off when we think it's in the upward direction. So, we did not have that philosophy before the pandemic, we used to just basically let it grow a little bit every day. But in the last year, since we've been back in the buyback again, we've been more opportunistic. So we'll continue to do that, but I fully expect another buyback authorization to come as soon as we get this $26 million done, or $28 million. I forgot what it was. $26 million, $28 million, whatever is left, get that billing them.

33:22 Okay. Great. Very good. That's all for me. I'll jump back in the queue.

33:27 Thank you. Our next question comes from David Bishop of Seaport Research. Your line is open.

33:35 Yeah. Good morning, Raj, Leslie. Hope all is well.

33:35 Good morning, David.

33:41 Hey. Just a quick question on the Atlanta initiative. It sounds like that's going to come to fruition relatively full bore here. Just curious in terms of the talent there, are those people already finding in place here? I'm just curious where these -- where the new staffing sort of came from and what's the outlook there in terms of timing for this initiative to be up and running?

34:07 They're not on board yet, but we're close.

34:13 And then in terms of the Dallas initiative, it sounds like there's already several hundred million of deposits within the market there. Is that going to be a pure deposit play or would this also sort of encompass loan growth potential as well?

34:29 I think in the short term, it will be pure deposit play. And eventually, it'll open up an option for us on the asset side. But we're not going to jump into the asset side, this year at least.

34:29 Got it. And then Tom, I appreciate the commentary in terms of commercial real estate. One of your competitors earlier this week talked about being some better pricing, better potential in terms of New York City multifamily commercial real estate. Just maybe update us on what you're seeing in terms of that market on the commercial real estate side.

35:05 Yeah. I would say that we would be in an agreement with those comments. We're certainly seeing -- particularly in the free market space, we're seeing a substantial return to the city. We're seeing month over month rents compared to last year, up in the 24% area. We're actually closed and committed to a significant number of new transactions in the New York market in December, and we expect to close another large one in the first quarter of this year. So we're seeing good quality pipeline in New York. Part of it, it's in multifamily, part of it's in suburban office, and we're also seeing opportunities in the industrial market. But there's certainly good growth in the city and multifamily, and we're actually seeing good growth in Long Island, in New Jersey and a bit in Westchester County.

36:02 Got it. Appreciate that color. And then Leslie, maybe one follow-on here. You noted the trigger in terms of the higher incentive comp in the fourth quarter. Just curious what triggered that? Was that related to loan growth, credit quality? Just curious sort of what triggered that $4.6 million, maybe what's the – help it for the –

36:21 I would say the high level, it's a combination of loan growth, the improvement in the margin and just generally the level of our operating results for the year, our discretionary bonus pool is not formulaically tied to earnings, but I would say it's really suite correlated with earnings, and we had a great earnings year. And so that’s -- with of all the -- combination of all of those things.

36:45 Got it. Any guidance in terms of maybe what the first quarter run rate could return to?

36:52 I mean the first quarter is always elevated because of payroll taxes and whatnot, but I would still say probably to be lower than this quarter was because of those adjustments to the variable compensation accrual. So it will come down some in the first quarter.

37:06 Got it. And then maybe one final one for you, Leslie. You mentioned you guys took an advantage of it to, I think it was a forward deposit hedge, maybe some specifics there with the [indiscernible].

37:19 Yeah. Give me a second. I do have this written down. I have to find the page. I think there's about $680 million that we put on in callable CDs. And the nice thing about them is, if rates actually were to go down, we have the option of calling those. Nobody is expecting that right now, but it was a pretty cheap option, and it's nice to have. They're at a weighted average rate of just over 70 basis points in a term of just over three years.

37:48 Three years. Great. Appreciate the color.

37:54 Thank you. [Operator Instructions] We have a question from Ben Gerlinger of Hovde Group. Your line is open.

38:14 Hey. Good morning, guys. I was curious if you could kind of clarify a little bit. I think you guys said mid to high-single digit loan growth, which kind of correlates to NII. And then from there expenses should be up a similar way. I was curious how you guys are thinking about rate hikes and what you have in their curve?

38:37 We run our models based on the forward curve. So our expectation is three to four increases this year. And we don't try to be smarter than the collective renewals in the market. So we just go with whatever the curve was. I think we’ve had our numbers as of the first week of January. I'm sorry, what was the question beyond the curve?

38:59 No, that was -- I was just kind of curious on how it would play into the NIM because, obviously, like there's a delayed effect. So even if there's a hike in --

39:12 Yeah. It will help in the second half of the year more than in the first half of the year because we're not expecting them to start right away. And like I said, we've never bet the ranch on rates one way or the other. We try to stay as neutral as possible, that's been the philosophy of the company since it was founded. So we are slightly asset sensitive that will help moderately. But I know there are certain banks that are way more asset sensitive than just betting on rates. We -- that's not us.

39:46 Ben, also to your question, we are expecting mid to high-single digit growth in net interest income.

39:57 Okay. That's helpful. And then, Leslie, I was curious if you could dig a little bit deeper, you said on the previous question that 1Q expenses are likely lower than 4Q?

40:09 Yeah. I was talking specifically about comp because of the special employee bonus that is in there and the adjustments we made in the fourth quarter to the variable compensation accrual. So, I was referring specifically to comp in those comments.

40:22 Got you. Okay. Yeah. I was just more looking at the cadence because you typically have 1Q is the highest and it kind of works lower the rest of the year. Is that something we should expect to see in '22 as well?

40:35 I don't tend to try to focus too much on what's going to happen quarter-by-quarter. I think Raj gave some overall guidance for the year. There is some hiring that's going to take place during 2022. And we really haven't hired anyone during the pandemic. And so there are a lot of open positions out there that are going to get filled. So I just really don't have in front of me what I expect it to be on a quarter-to-quarter basis.

41:06 Okay. That's helpful. Thank you.

41:09 Thank you. Our next question comes from Steven Alexopoulos of JP Morgan. Your line is open.

41:19 Hi, good morning. This is Alex Lau on for Steve.

41:23 Good morning, Alex.

41:23 Good morning. One question on the mid to high-single digit expense growth. Can you clarify the base that you're growing off of? Maybe a specific number given that a lot of one-time items? Thank you.

41:36 Yes. 2021 adjusted for that list of non -- notable items that are in the press release for the fourth quarter of 2021.

41:48 Got it. So adjusting for those 4Q items. Okay.

41:52 Yeah. Exactly. And it's going to be, Alex, in the comp and tech lines. That's where we're going to see it, in those two lines.

42:01 Thank you. And on your non-interest bearing deposits now at 30% of total deposit growth, with the Fed likely to rate -- hike rates later this year, do you think you can grow this concentration throughout the year? Thank you.

42:20 We think we have room to grow, but I also think realistic that in a rising rate environment, the tailwind will become a headwind. So it's very hard for me to say where all this will eventually fall. What I can’t look at is pipeline and see if we have new customers signed up and in the process of transitioning over, and that's the case. So we're happy about bringing in new clients, new accounts, new relationships. But at the same time, what will be the headwind coming from a different monetary policy, when it appears, how quickly do customers react to it, I think that is a second half of the year headwind. And it's really hard to quantify. So overall, I'm optimistic. We have room to grow, but we're certainly not grow 28% like we did last year. That's not -- that's -- given everything I said, that's not the case. 43:18 So we're more realistic on there, but we do -- we are incenting our teams for net growth on DDA this year. So they are very much still focused on pushing on that front. We're not pushing so much on total deposit growth because like I said, I'd rather run down some low-yielding assets and use that to fund high yielding assets, high spread assets, and optimize the left side of the balance sheet while keeping capital available for other things as a buyback. So total deposit growth is not kind of move the needle so much, but DDA, we're still very much focused on. It will be a smaller number than last year over the last two years. But it's -- I'll confess that it's a little hard to really predict what will happen.

44:10 Understood. Thanks for --

44:11 I might add for Raj, also, when you look at the loan growth numbers and you look at an accelerated expectation of loan growth in both the C&I and the CRE books, while it moves from year-to-year, I would say, 70% or so of the growth that we would anticipate would largely come from new relationships. In the new relationships, you tend to pick up new deposits as well. So w’'ll see new relationship generation on the loan side will also drive NI-DDA growth in the year.

44:44 Thank you for taking my question.

44:48 Thank you. And our next question comes from Samuel Varga of Stephens Inc. Your line is open.

44:59 Good morning.

45:00 Good morning.

45:01 Good morning.

45:02 I wanted to ask a question about expenses. I understand the guide you're providing in kind of the one-time items that were discussed. Could you kind of give some color on -- if we take those one-timers off, as the 4Q results are still a step above the last quarter, so kind of on the baseline run rate was there anything specific that bumped data?

45:30 I mean, I’m not -- I think I understand your question. I'll try to answer it. If I get it wrong, please let me know. The baseline would be taking the 2021 expenses and just subtracting out those $58 million, $59 million worth of notable items that ran through the fourth quarter. And that would be the base on which our guidance is predicated. I think we've got all those listed in a table for you in the earnings release.

46:04 Yeah. I guess what I'm trying to look at here is, if I look at kind of the operating expenses, then we have a number of around 1.20 for the last fourth quarter, and for this quarter, it's more like 1.30.

46:19 Okay. I mean I trust your math. I mean, I really don't think about this quarter-by-quarter. I really think about it more on a year-over-year basis. And as Raj guided to mid to high-single digit increases over the course of 2022 compared to that baseline number driven mainly by comp and technology investments than in comp, we've got the labor markets tight, we've got open positions we need to fill, and I think that's a truth across not just the banking industry, but corporate America. So -- and those are the two lines, you'll see those increases in. The technology line because of the investments we've been making and the comp line. But I really don't think about it so much one quarter to the next. Really, we're looking more year-over-year.

47:05 A lot of the comp line is investments in future growth.

47:08 Exactly.

47:09 This is like Atlanta and Texas and other major initiatives we have on the revenue side.

47:14 Yeah.

47:15 Understood. Thank you. Thanks for clarifying that. Then switching to the securities book, can you give me a couple of numbers? I'm looking for the percentage of floating rate securities of the total securities book?

47:29 I can tell you the duration of the book is about 1.5.

47:30 And then -- actually, on that front, could you -- is there a breakdown between available for sale, specifically for this duration?

47:39 It's all available for sale. It's virtually all available for sale. And you can find all of that in our 10-Q, as we only have $10 million worth of HTM securities.

47:47 Understood. Thank you. That will be enough for me.

47:50 Okay. Great.

47:52 Thank you. And I'm seeing no further questions in the queue. I will now hand it over to Mr. Singh for closing comments.

48:01 Listen, this is a very, very solid quarter. No, matter how you look at it. We're feeling very excited about what ‘22 will bring. We do want to get back into the office that's been my biggest complaint. With this, it is -- this has been a weird two years, but I see a lot of momentum in the economy. I see a lot of momentum inside the company, a lot of enthusiasm for what's coming. We are investing, as you can see from our expansion in Atlanta and Dallas. Because I think where we are in the business cycle, this is the time to invest and invest aggressively and bring the benefits of that in the coming years. So I'll end with this note of optimism. Hope to see you guys in person and not on Zoom. And thank you so much for dialing-in. We'll talk to you again in three months. Thanks, everyone.

49:00 Bye, everybody.

49:04 This concludes today's call. Thank you all for participating. You may now disconnect and have a pleasant day.