BankUnited Inc (BKU) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankUnited second-quarter earnings call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to turn the call over to your host for today, Ms. Mary Harris, Senior Vice President of Marketing and Public Relations.

Ma'am, you may begin.

Good morning and welcome.

It's my pleasure to introduce our Chairman, President and CEO, John Kanas.

But first I'd like to remind everyone that this call contains 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.

The Company generally identifies forward-looking statements by terminology such as outlook, believes, expects, potential, continued, may, will, could, should, seeks, approximately, predicts, intends, plans, estimates, anticipates, or the negative version of those words, or other comparable words.

Any forward-looking statements contained in this call are based on the historical performance of the Company and its subsidiaries or on the Company's current plans, estimates, and expectations.

The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates, or expectations contemplated by the Company will be achieved.

Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to the Company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity.

If one or more of these or other risks, uncertainties, materialize or if the Company's underlying assumptions prove to be incorrect, the Company's actual results may vary materially from those indicated in these statements.

These factors should not be construed as exhaustive.

The Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future development, 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, 2014, on the SEC's website, www.SEC.gov.

John?

Thanks, Mary.

Net income for the quarter, just under $47 million, $46.6 million; $0.43 a share, generally in line with consensus expectations.

New loans and leases grew as expected by about $1.2 billion for the quarter.

That includes the addition of the SBF loans, the recent acquisition; so $174 million of that number is represented by those loans that we recently booked.

Deposit growth was very strong for the quarter, just $985 million.

Of the loan and lease growth for the quarter, with respect to geography $526 million of that came from New York; $185 million of it came from Florida; and just over $500 million came from the national platforms.

That would include both the operating leases and also the SBA company recently onboarded.

So as the book stands today on our balance sheet, 35% of our loans reside in Florida, 33% in New York, and 32% were derived from our national franchises.

We've achieved about exactly the diversity that we've been aiming for: about a third, a third, and a third.

The pipeline as we go into the balance of the year is very, very strong.

We continue to reiterate our expectation for growth of somewhere between $4 billion and $5 billion, probably closer to the upper end of that number.

We've hired a bunch of new teams and that's beginning to show especially in Florida for the next quarter.

We've hired teams in Jacksonville, Tampa, and Orlando and they're beginning to get some real traction.

As I said, given what we're seeing today, we expect then the total growth would be something over $4.5 billion for the year.

The first six months of this year we have added 20 new lenders and private bankers in our key markets: nine of them in the Florida market, primarily in Jacksonville, Tampa, and Orlando; five new lenders in New York and a couple private bankers as well; and two new lenders in [UCBO]; and three additional private bankers in New York in the retail market; and a market executive in Miami-Dade.

Deposit growth was concentrated this quarter.

Of the $985 million, $833 million came from New York, $153 million from Florida.

Asset quality remains strong, the ratio of nonperforming loans to total loans at 46 basis points, and nonperforming assets to total assets of 29%.

There is a slight uptick in nonperformers this quarter; that relates to one loan that we put into nonperforming.

It is paying down actually rapidly as we liquidate collateral to get out of that thing.

Our workout people think that will be by and large off the books certainly by the end of the year, if not -- probably by the end of next quarter.

I'm going to turn it over now to Raj (multiple speakers) give a further update.

Sure; right.

Thanks, John.

This quarter we closed the SBF transaction, as John mentioned.

The deal closed on May 1.

We acquired about $250 million in loans, of which 82 were held for sale and the rest, $174 million, are in the portfolio which John referred to.

We booked a servicing asset of about $10 million.

Goodwill from this transaction, even though we paid a premium of $20 million, by the time we're done with purchase accounting and allocating that premium, the goodwill will come out at about $10 million.

The original estimates for accretion stand; this should be a 2% to 3% accretive deal to us on earnings basis.

And there is some one-time expense flowing through, about $1 million roughly in this quarter.

There will be some more one-time expense related to retention which will flow over the next two years, but the numbers are not that meaningful to BankUnited.

The tangible earn-back is looking even better, given how little goodwill we booked.

Turning to deposits, loan-to-deposit ratio is now at 94%.

We've had a very robust deposit growth quarter where we've covered about 80% of our loan growth with deposits.

This might actually have been our biggest deposit quarter if you go back and look.

Cost of deposits steady at about 60 basis points.

It was 59 last quarter.

The deposits in New York are growing very strongly.

New York now is roughly $3 billion in our three marquee branches, and we expect that to continue to grow over the course of the next three or four years due to a number which will be a multiple of what it is right now.

So long-term goal is to make New York self-funded, and I think we'll get there in a fairly short order.

I know there will be some questions about taxi medallion, so I just wanted to throw some numbers out there.

Our taxi medallion exposure is $215 million.

This number has been fairly flat over the course of the last few quarters because we took our foot off the gas pedal a while ago.

So $215 million; it's about 1% of our total balance sheet.

The portfolio is 94%, 95% New York and the rest is a combination of Atlanta and Chicago.

The delinquencies in the portfolio are virtually nil.

We only have two delinquent relationships, 1 over 60 days, 1 over 90 days.

Total of about (technical difficulty)

The cash, the DSCR, the coverage, the debt service coverage is very, very strong on this portfolio, which is what we're monitoring very carefully.

Less than 2% of this portfolio has DSCR of under 1.25; and more than half the portfolio has DSCR of over 2.

Also the portfolio is predominantly amortizing portfolio.

Over 80% of this portfolio amortizes.

The current LTV we estimate at about 74%, though that is the hardest thing to estimate since valuations are very difficult to come by.

The market is not really -- there is not much trading going on.

But based on our internal estimates, we think LTV is about 74%.

But we're more focused on debt service coverage ratio.

On top of that, we have increased our reserves just because of the uncertainty that exists in this market.

With that I will turn over to Leslie, just go over the financials in a little more detail.

Sure.

Thanks, Raj.

This quarter net income was pretty much in line, flat to the prior quarter.

That was in line with our expectations and what we've been communicating to you.

We did see an increase in net interest income of $8.3 million or 5% compared to the immediately preceding quarter.

We continue to expect quarterly growth in net interest income.

NIM continues to be under pressure as the new loan book comprises an ever-increasing proportion of the total book.

Declined to 3.95% this quarter from 4.02% in the immediately preceding quarter.

We are seeing, as expected, the rate of decline in the NIM slow down a little bit.

On average this quarter, coupon on originations was very marginally lower than the prior quarter, but that was mainly because it's reflective of a higher proportion of floating-rate loans.

So on balance we didn't really see much of a shift in pricing this quarter as compared to the past quarter.

Our cost of funds, cost of interest-bearing liabilities remained consistent at 82 basis point.

That's come down from a year ago mainly due to rollover and repricing of what had been some higher-rate time deposits and FHLB advances that had been on the balance sheet.

We still expect to NIM for the year 2015 to be between that 3.80% and 4% range, probably between 3.80% and 3.90% for the year as a whole.

In line with our previous guidance, we continue to anticipate that EPS will increase now, moving into the third and fourth quarter of this year, as we've been communicating all along and that's what we continue to see.

Consistent with our prior communications, we expect high single-digit growth in noninterest expense for the year 2015 compared to the year 2014.

And that is inclusive of additional costs that have come onboard related to the SBF acquisition and these new teams that we've onboarded.

We still think we'll be in high single-digit growth.

And that's excluding the amortization of the FDIC indemnification asset.

We do expect for next quarter both the rate of amortization on the indemn asset and the yield on the covered loans will increase.

Our expectations around the allowance remain unchanged compared to previous guidance.

We expect that in the near term to stay relatively consistent or trend just slightly upward as an overall percentage of loans outstanding.

From an interest rate risk perspective the existing balance sheet remains neutral.

Nothing really has moved the needle materially on that front.

We have seen a slight downward shift in overall duration this quarter, but not enough to represent an overall change in the outlook there in the neutral position that we've communicated to you in the past.

John?

Anything you want to say in wrap-up here?

Oh, no, this is -- we are where we expected to be.

We appear to have turned the corner.

These last two quarters have been less than stellar in terms of earnings per share, and if everything goes the way we expect it to go for the next two quarters we think that you will be happy with those results.

Growth continues unabated in both of these markets.

We're seeing no sign of economic erosion even in Florida, where we are vigilant and continue to watch for it.

New York, although a crowded market and very competitive, still offers more than enough opportunity for us to put on this kind of loan growth and achieve deposit growth that's consistent with credit requirements and our pricing requirements.

So we're very pleased with where we are and we look forward to the balance of this year optimistically.

Having said that, let's take some questions.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

Hey, good morning, everyone.

Maybe I'll start -- so we now have the earnings drop behind us.

I'm just curious.

As we think about earnings from the covered loans really moving away and earnings from the originated loans really starting to dominate, from this point how are you thinking about -- should we see a more gradual rise in earnings?

Should we see a more steep ramp in earnings given your comments, John, around loan growth picking up in the back half of the year?

How are you thinking about that?

I'm going to let Leslie give you a more finite answer, but we're comfortable with what expectations are and what analysts' expectations over the balance of the year.

That gives you a reasonable picture.

This is not a hockey stick; this doesn't start today and go straight up, but it certainly goes up for the balance.

And you will see that in the third quarter and then again in the fourth quarter.

So it if you look at analyst estimates for the year, we believe that if everything happens the way it appears that it's going to that we'll be on the money.

I would echo that.

I think that's a good summation.

Okay.

I'm curious; in a story that was released last night, they talked about irrational competition in the New York City market.

That's why their loan portfolios shrink again; talking about their -- basically multifamily and CRE being refi-ed away.

And you guys had most of your growth actually in New York City.

Can you talk about the competitive landscape there?

Is it changing your appetite at all for multifamily or CRE?

No, that has never changed.

We've been in that market for 35 years and it's -- I've been and most of our lenders have been.

That's never changed.

It's the most competitive market in the world, but it's the most robust market in the world.

You've heard me say before that there are a number of banks that have recently entered that business, probably including Astoria and others who have never been in New York before.

And they don't really get a shot at the kind of credits that have had relationships with us for 25 and 30 years, and other banks like us.

So I think that if you're a newcomer or in town and you're having to deal with the B and C credits and the very smaller loans, you're probably seeing that kind of competition pretty aggressively.

We don't play in that market, and we don't really see that as much.

As competitive as the market is, it's been fairly stable over the last few quarters.

So we wouldn't say that it's gotten any worse or better.

It's been pretty steady.

Okay.

The one thing that Signature spoke of was very recently increasing their pricing on multifamily.

Could you talk about what you guys have done there?

Thanks.

Yes, I don't know that we've been able to -- look, I only get to see the largest loans that come across my desk, and I will say that I've seen some better pricing on some of those than I've seen in the past.

I'm not ready to call that a trend, that we're able to get better pricing.

But again, all of these things are different.

Remember that everybody has a different definition of multifamily.

If your definition of multifamily is something that fits in a small box, it is 100% residential, and it has a certain expectation for debt service coverage, and it is a certain size, then pricing tends to fall in the box as well.

We have always tried to diversify the portfolio a little bit.

So a lot of our deals will be deals that are maybe 80% residential and 20% commercial.

We traffic in relationships that we've had for many, many years where we'll go ahead with a guy and help him to buy a building that's not cash flowing today, so we get a little bit more vig on the deal until it is cash flowing -- or refinances away from us to a different lender or an insurance company or a different bank or an insurance company.

So I think that everybody who makes comments about multifamily lending is talking about a variation of the same assets, but they are not all exactly the same.

Having said that, Steve, what Signature Bank said yesterday on their call of moving rates up, base rates up by an eighth, it's a good sign.

Yes.

No, listen (multiple speakers) competitor; they're not going the other way and I would agree more with Signature than I would with apparently what Astoria said.

Okay.

Excellent.

Thanks for all the color.

Brady Gailey, KBW.

Hey, good morning, guys.

Leslie, your comments about the way to look at the yield of the IA and the covered loan book, I think it was around 9.5% in the second quarter.

You all have been saying that it should be around that 9% to 10% range.

I think I heard you say that that yield should trend up a little bit from 2Q.

Is that --?

No, it will stay at -- the combined yield will stay in that 9% to 10% range.

What you'll see is both pieces go up in Q2: the rate of amortization on the indem asset will go up and the yield on the covered loans will go up.

But I think you'll still see that combined yield between 9% and 10%.

Okay.

Got you; got you.

Then I think I'm looking at this right, but you all for the first time had a really class from accretable to nonaccretable in the second quarter.

I was just -- I don't think we've seen that before.

I wonder what drove that.

Brady, I'll answer that at a high level, and if you want to dig into it a little bit more, give me a call later.

But it really had to do with changing in the modeling of the timing of cash flows.

Okay.

I'll be happy to go into that in a little more detail with you if you want to give me a call later.

Okay.

Then lastly can you all just update us on your plan?

You all talked a lot about maybe raising some non-common capital at some point over the next year or so.

Could you just give us your updated thoughts on a potential capital raise?

We've been watching that for the last two quarters and we would reiterate what we said before.

Late this year, early next year, if everything happens as we expect, there will be a need for us to start getting serious about some -- probably some debt.

Obviously whatever's cheapest.

But that's either a late 2015 or early 2016 event, as we expected it would be when we announced that earlier this year.

Okay.

Thanks, John.

Jared Shaw, Wells Fargo Securities.

Hi, good morning.

Just circling back a little bit on the multifamily, could you update us with what the quarter-end balances were on multifamily?

And then as you were looking at originations this quarter, did you have the opportunity to look at some larger packages of either individual loans or packages of loans?

Leslie is rifling through papers here trying to give you that number.

Give us a second.

So the balance at quarter-end in multifamily was about $2.3 billion in New York and about $450 million in Florida.

What else did you ask?

Yes, are you asking did we see bigger packages?

What was --?

Right, yes.

Were you able to look at larger loans, larger packages of loans?

No, not particularly.

No.

No.

The same.

Okay.

Then when you look at Florida, it looks like a little bit of a slowdown in Florida.

Was that intentional, or is that more market-driven?

Is that -- you're waiting as these new teams come online, and some of that could be more back half of the year loaded?

Yes.

There are two things.

The pipeline for Florida, by the way, going into the third quarter is very strong, much stronger than this quarter.

Much of that is driven by the new people that we brought on.

At the same time, we have backed away a little bit particularly in the South Florida, East Coast area of Miami from some of the larger credits as they've come back for renewal and there's more pricing competition and more term competition.

We backed out of a couple of deals that we thought were too thin for us and let them go.

But I think you heard me say last quarter we began early this year to start to spread out our loan origination mechanism across the state, and we're finding that we're getting a very, very strong early indication from areas like Tampa and Orlando and Jacksonville -- and a lot of that, yes, is attributable to the new folks that we brought on.

So generally speaking, I think Florida will probably surprise on the upside for the balance of the year.

So as we look more longer-term you still feel comfortable with that one-third, one-third, one-third mix between the markets?

Yes, it's a little hard to look out beyond the next year or two, because New York is such a huge market and it has the potential to grow so much faster.

But we are in control of that.

So we will -- as it looks right now, yes.

But we might opt to change that mix over time.

It's a little bit market-driven, too.

So if the competition is too much in any one geography or any one product segment, you will see us pull back a little bit.

So to guess where competition will be this time next year, it's very hard.

Or market conditions.

Or market.

So a third, a third would be sort of ideal from our perspective, but we don't try and solve for it.

It just happens to fall where it does.

Okay.

Okay, thanks.

Then, Leslie, looking at the comp expenses this year, what portion of the added teams are already included in comp for the quarter?

Should we expect to see a continued move up next quarter?

Most of those 20 or so people that John talked about were pretty much included in the Q2 run rate.

I think we are still continuing to have some conversations (multiple speakers) people.

Well, we certainly hope to onboard some more people over time.

But I think the bulk of them are in.

Okay.

Then, finally, John, if you could just get a little comment on your thoughts on M&A and the opportunity to do some additional deals, and what type of deals those could potentially look like, given where you're seeing the market.

Whether it's more loan deals like a Certus, or whether it's a depository-type structure.

We continue to observe this market.

We were happy to see Joe Otting's deal get approved yesterday, the CIT-OneWest deal.

We were watching that very closely.

We're watching another -- a number of other transactions that are before the regulators right now to see when and if they get approved and what are the conditions of their approval.

And that makes a big difference to us.

Some of the recent approvals that we've seen have come along with some commitments from the acquirers that are pretty daunting, frankly.

So in terms of the opportunities, we continue to have, oh my God, five, six, seven different conversations all at once with people who we think at some point make a lot of sense to be partners of ours in the future.

But not now.

Our stock, we believe, is at a low ebb, frankly.

Because I understand that -- I know our stock's done well, but we've been -- we've done well with the rising tide of all mid-cap bank stocks over the last six months.

But in terms of relative valuations, we haven't really improved.

We think that when we start showing the market this turn in earnings, and showing the market that what we had prognosticated happens, that our currency gets stronger.

And most likely that would lead to us getting a little bit more serious toward looking at these transactions.

But, frankly, I guess the way for us to put it is: M&A for this Company is a nice-to-have, but it's not a need-to-have when you're growing at $5 billion a year and able to control that growth in these two markets.

So it takes -- it would take a lot in an M&A deal of value for it to take our attention away from the growth that we're getting organically.

Great.

Thank you.

I appreciate the color.

Ken Zerbe, Morgan Stanley.

Okay, thanks.

Hey, John, just following up on your comments about Florida that it sounded like -- and correct me if I'm wrong -- but it sounded like that on a same-store sales basis that it was just harder to continue to grow loans in Florida because of the competition.

So hiring people was the answer, which basically adds new markets, new people; but that's where the growth comes from.

Is that right that it's necessary to add more people in order to continue to grow in Florida?

No.

I probably didn't explain that well, Ken.

We -- almost all of our growth in Florida, because that's where we hired lenders, came from that Miami market, Miami-Dade.

That's where we started and that was the big -- that was the frontier of the recovery in Florida.

Started in Miami, and you've heard me say before that it's now spread out to the rest of the state.

So what we've done is as economic improvement makes its way across the state, we started adding teams of people in different markets and are finding that some of those markets offer as good an opportunity, if not better, than what we're currently seeing in Miami-Dade.

Although Miami-Dade, look, it's the New York City of Florida, but it's an extremely competitive market.

We also -- what we're doing, and I don't know how to explain that very well.

Some of these deals that we're backing out on, in earlier times going back two in three years, we took pieces of larger credits in Miami that -- we were in syndicates of Florida loans.

We're backing away from some of those things.

We don't need them anymore.

So we're finding it's easier to originate loans in other parts of Florida, right -- or certain types of loans in other parts of Florida than it is in Miami at our price levels, at our expected price level.

John, I might add some color to that; this is Tom.

Yes, it's Tom Cornish.

Go ahead, Tom.

When you look at Florida for the second quarter, we actually grew commercial real estate loans by $213 million, which was the largest quarter we've had in the last two years.

Our small business lending portfolio was up about $30 million.

The off number was really the larger corporate portfolio, where we stepped back away from our Shared National Credits that probably cost us $75 million in outstandings.

Because we were comfortable with that exposure level, and when that deals got redialed they got oversubscribed and the existing level that we were in at was cut back.

We also stepped away from a large foreign-currency syndicated transaction that wasn't exceptionally profitable for us, but did come with a strong depository relationship.

We backed out of that but kept the depository relationship.

So the origination line in the large corporate book for the second quarter was right in line with where it's been for the last six quarters.

What we saw was an anomaly as it related to these net paydowns and some sales of some properties and some other things.

But the origination top line continues to be very strong as we head into the third quarter, both within the core South Florida market as well as the other markets around Florida.

We're seeing we'll probably have a $100 million portfolio in Jacksonville by the end of the third quarter.

So we're seeing good growth around the rest of the state, and I think the second quarter just had some noise in it because of positions that we're now taking on some of these Shared National Credits where the underwriting as they redial these deals is getting more and more looser from our perspective and we can back away from them.

Another way to look at it: this is a rebalancing in Florida to loans that we would prefer to do.

Got it.

Okay; that helps.

Then, Leslie, quick question for you.

The amortization of the FDIC indemnification asset, over the next couple quarters -- not to ask you to spell it out.

But is it -- did you say it was going to go up in third quarter?

I did.

I did, Ken, and I can't really comment on the fourth quarter.

I know that sounds -- we run those cash flows every quarter.

Understood.

Is it -- I guess is there a time where it should naturally peak?

Yes, but it's difficult to predict exactly when that will be.

That will happen, but it's difficult to predict the quarter in which that will occur.

Got it.

But are we talking somewhere in the next year or --?

If I had to guess now I would say yes.

Okay; but there is a range.

Understood.

Yes.

All right.

Thank you very much.

Stephen Scouten, Sandler O'Neill.

Hey, good morning, guys.

Thanks for taking my questions here.

I missed some of your earlier comments, John, on the open, so apologize if anything is redundant here.

But what are you guys doing specifically to prepare for the potential of a rising rate environment, specifically on the deposit side?

Just as I continue to look at that prospect, if I'm screening it right, about 6.2% of your loans reprice within a year, so it seems like there could actually be some issues maybe on that first move for you guys.

Can you speak to that a little bit?

Let me let Leslie go first, and then I'll give you my take on it.

So, Stephen, in terms of preparing for that on the deposit side, we have done some things to promote some term there.

We've also -- I think you got to look at the liability side of the balance sheet as a whole; and we've extended out some of the term of our wholesale funding, our FHLB advances, using derivatives to prepare for that as well.

We did see this quarter both duration of assets come down and duration of liabilities lengthen a little bit.

So we're chipping away at that.

But again, I remind you, the balance sheet is pretty neutral, so we are not exposed one way or the other materially to movements in rate with respect to the existing balance sheet.

It's a real -- it's very difficult to predict what's going to -- we haven't seen rates move up in, what, eight or nine years.

So nobody really knows what's going to happen.

I will tell you from my experience -- I've been around this business a long time -- my guess is the consumer deposit is going to go up a lot faster than the commercial deposits are.

We are -- if you look at our deposit growth, it is principally commercial deposits.

In New York, it's 95% commercial deposits.

So while every bank is going to have to contend with this and deal with it, my personal belief is that we'll get a little bit of a break there because these commercial relationships are tied into the Bank in many ways.

They're treasury management and cash management customers that are tied in, many of them through credit arrangements; and so we think that we'll get a little bit of a breather there.

But listen, I believe and have publicly stated that deposit pricing is going to go up pretty quick when the Fed finally moves.

For that reason I don't think it's -- I don't think, as many people have stated, while higher rates mean higher bank profits across the board, I think that is a drastic oversimplification of the industry, and it's reflected in the way that all bank stocks have performed exceedingly well in the last six months.

I think that's a mistake.

I think you need to weed through and see which ones will benefit from it and which ones might actually be punished by it.

I agree.

I'll add to that.

It's not just one element, which is deposits that are worked up on the balance sheet.

The FHLB borrowings that are termed out to four and five years; securities portfolio, that has a duration of 1.4, 1.5, kept very short for a very long period of time.

And even our deposit portfolio -- a piece of our deposit portfolio we've synthetically extended.

That's why our cost of funds looks a few basis points higher than what we actually pay the customer.

So we've used all the tools that are available to us.

If you look at our deposit mix, by the way, we sometimes take some heat from the analyst community because our CDs are at 30% or -- I forget the exact number, but somewhat -- or about 30% of our deposit base.

And that is by design.

We're trying to have some term built in because at the end of the day, as John said, money market and savings accounts, their betas are largely unknown.

We don't know what customer behavior will be when rates do start to move.

But when you have a CD, whether it's 12 months or 18 months, at least for that period of time you know exactly how that is going to behave.

Okay.

Yes, that makes sense.

That makes sense.

Then just one question on the potential pace of growth; and I'm assuming this is in the national portfolio but -- and I also assume that this press release is relatively immaterial, but just want to get some color on this team, maybe the dealer finance team that left.

Or -- what portion of your growth there did they constitute?

And is this anything that will diminish the forward growth at all?

The dealer finance team, are you referring to the indirect auto team that we let go last year?

I don't think so.

There was a press release from Signature a couple days ago that said that they had taken a team from dealer finance.

Maybe that is what it is, and I'm just not realizing it.

That is what it is.

That's the business we opted to get out of because we don't think the risk/reward is appropriate in that business.

Perfect, perfect.

That's great.

Yes, we're happy for the team that they landed.

Sounds good.

Sounds good.

Thanks, guys.

I appreciate it.

David Eads, UBS.

Hello.

Maybe just following up on the balance sheet there, we saw that the securities book ticked up a bit.

Was that just putting -- where the increased -- the borrowings you put to work, or should we expect that to grow with the balance sheet?

Or what are you thinking about there?

David, and that was just really opportunistic on our part.

With some of the dislocation that's been in the bond market over the last quarter or so we just saw some opportunities to put some money to work, and we took advantage of them.

So there's no real plan to grow the bond portfolio.

But we found some things we felt it made sense to do.

As the G-SIFI banks restructure their balance sheets, there's opportunities in the liabilities side and also in the asset side for mid-cap banks.

As Leslie has mentioned, we've seen some very interesting opportunities in the asset coming in, in the form of bonds where our larger brethrens are being forced to shrink their balance sheet and get rid of both sides at the same time.

So we been able to get some very nice yields that we have never seen before.

Great.

Then just to clarify, when we look at the increase in other noninterest expense this quarter, I think you indicated about $1 million of that was related to the deal and nonrecurring.

But then we should expect some level of immaterial transaction-related costs over the next couple years; is that the right way to think about it?

Yes, it was about $1 million this quarter and there will be some retention payments which will be coming over the next eight quarters.

But if I look at it on a quarterly basis, I would say it is immaterial to the Bank's numbers.

Okay, thanks.

Joe Fenech, Hovde Group.

Morning.

On the taxi medallion business, Raj, what do you think you all have done differently?

Is it just geographic positioning and that New York seems to be holding up better?

Or do you think you were more conservative than others?

Why do you think you are not seeing the issues that some other people are seeing?

We were focused on New York.

Like I said 94%, 95% of the portfolio is New York.

I think we took our foot off the gas pedal early, so we really have kept this thing flat for quite some time now, several quarters.

We also insisted on amortizing loans.

I know there is a market for amortizing and there's also a market for I/O loans.

While we have some I/Os, it's less than 20%.

So I think it's just early on we made some choices.

Of course, the market is in disarray, as we speak, but I think we'll fare okay, given the kind of debt service coverage ratios we have, and that's what we have to focus on.

With more than half the portfolio being over 2, that's about as safe as you can get in commercial lending these days.

Yes, our folks who handle this business of been in this business for many, many years and have seen it come and go.

I would credit them by saying they reacted quickly here.

You probably -- the best example of that is the percentage of loans that have debt service coverage over 2 times in this portfolio.

So it's -- look, this is a very interesting asset class.

It's going to morph here over the next couple years.

Nobody really knows what's going to happen, but I'd be willing to bet that ours hold up better than most.

Okay.

Back to Steve's question on the earnings ramp, as we think about longer-term profitability potential, it would seem that the key would be getting efficiency down.

Raj, you talked about this in the past and what you were all able to do at North Fork.

In New York, it would seem that that's going to be easier to do with the branch-light model, I'll call it.

But in Florida, with more of a traditional branch presence it would seem to be tougher to do that.

So can you talk about that maybe conceptually, how you think about efficiency and overall profitability potential longer term?

Sure.

Florida, yes, it will be -- we will never be able to get the level of efficiency that we will have both the New York as well as our national businesses.

Having said that, that doesn't mean that it will not be more efficient than our competition.

We have not grown our branch network for some time now.

In fact, we might even shrink it over the next couple years.

But we are continuing to grow the footings, both loans and deposits.

So as that growth comes on top of a fixed expense base, we will see efficiencies, operating efficiency generate at Florida as well.

It just will not be of the level of New York.

We can't have -- in New York, it would be okay to expect a $3 billion branch or a $4 billion branch; that's not going to happen in Miami.

But our branch sizes in Miami or in Florida in general are pretty big compared to our competition.

But structurally as you put it all together, Raj, do we see an efficiency, overall efficiency, with a 4 handle on it?

Or is that too aggressive to expect?

I think it's hard to guess a couple years out, but I would say 4 handle probably is achievable; but 3 handle is not.

But it all depends also on how the cost structure of the industry evolves, what other things we have to spend money on over the next two or three years.

But in a vacuum, I would say yes: 4 handle should be achievable.

Okay, and then one more for me.

Just, John, building on a prior question on M&A, there was a larger deal in Florida that you all acknowledged having interest in a few years ago, and that still hasn't closed.

I won't ask you about that one specifically.

But obviously, pricing in Florida has risen pretty dramatically since that deal was announced, and you couldn't get the pricing then to make it make sense.

Is it fair to say that if we didn't see you do something a few years ago, when pricing was lower, that whole bank transactions are probably less likely in Florida for you?

Or is that too strong a statement?

That's a fair statement.

The one you're talking about is City National and that was one that -- it was unique for us because it's right across the street from us and we thought the cost-save opportunities in that deal were really very, very impressive, let's put it that way.

But it is fair to say that if we couldn't get there at the price two years ago, we're not likely to pay a higher price for that company today unless there's something materially changed in that company, and I don't think so.

So as a general statement it's fair to say that it is not likely that you see us buy one of these smaller franchises in Florida.

They just don't seem to make any sense.

So we look for the opportunity here that nobody else seems to be able to find.

And we look for -- everybody is in search of the mythical transformational deal that we all talk about, but we just don't see right now.

So for the time being, we're very happy to just keep growing on an organic basis.

Okay, thanks.

David Darst, Guggenheim Partners.

Hey, good morning.

Your deposit growth in New York is really accelerating.

Is that maybe the right volume run rate that we should see going forward, based on the capacity you've got now?

It's hard to say.

It's going to be choppy.

There will be quarters when we will do more than that and quarters when we will do less than that.

But I think if you look back on a quarter-to-quarter basis over what's happened since we got to New York two years ago, you get the drift of what we can expect for deposit growth out of that market.

Remember, it's -- we are a tiny speck in a $1 trillion deposit market in Manhattan.

So we are almost completely in control of how much that grows.

Okay.

Then just as you look at the deposit opportunity in places like Jacksonville and Tampa and Orlando, those are new loan production offices.

Are those teams bringing in deposits as well with relationships?

They are bringing in some deposits, but we frankly haven't concentrated on that yet.

That I think is the next step for us in Florida, and I expect that there's opportunity there that we haven't really thought about yet.

But we are -- there's opportunities we haven't achieved there, but there is certainly room for us to grow on the deposit side in those markets.

Okay.

Then one more.

If you were to take out the earnings from the covered loans, would your ALCO profile still be relatively neutral, or would it be any more asset sensitive or liability sensitive?

Frankly we haven't done a lot of analysis around that, because the reality is the covered loans are on the balance sheet.

So we really haven't done a lot of analysis around what that would look like without them.

I can't -- I don't know.

I would have to think that through, David.

Yes, I agree.

I mean the covered loans are not very long.

Even though they are residential, remember they cliff in 2019.

So regardless of what the underlying asset might be --

I doubt it would be that different, but we haven't done a lot of specific analysis on that.

If you think of it as one asset, right, they all come due in 2019.

Because there is no tail risk on our FDIC deal, remember that everything gets put through.

So I don't know.

My gut is it wouldn't be much different.

Okay, got it.

Great.

Thank you.

Nice quarter.

Gerard Cassidy, RBC Capital Markets.

Question, I don't know if it's for you or for Raj.

But can you give us some color on the small business lending operation that is now onboard, what you guys see for it over the next 12 months?

You've had incredible success with that municipal business you bought some years back out of Arizona.

Could it mirror that kind of growth?

For the first 12 months that we generally get into a business, we tried not to step on the accelerator.

So the marching orders to the team that we have brought in is to just keep the business steady, get it operationally well situated in the BankUnited infrastructure, and growth will come after that.

So the first year do not expect any kind of growth that is spectacular or anything; it will probably be just modest growth.

From there on, we will grow this, but remember this is not a balance sheet intensive business.

This is a gain on sale business.

So while the municipal business, yes, grew from zero to nearly $1 billion over five years, here the originations will grow over time, but the balance sheet will not grow.

It will just generate more fee income.

That's right.

I think you'll see volumes grow in this business after we get everybody situated, but it's not going to -- it doesn't grow the balance sheet.

Yes.

But, Gerard, it's hard to give you an answer like three years from now will this be 3 times the origination volume or not.

We'll see.

We try not to set very long-term goals for our people.

Short-term goal is just to operationally stabilize it and bring it into BankUnited's risk infrastructure, which is what they are doing right now.

There is an industrywide issue in SBA lending which you may have heard from others, which will probably kick in in August.

The SBA is running out of funding, and if Congress doesn't move between now and --

They did something yesterday, I think.

It hasn't happened; no.

Our guys were on the call this morning also.

They are running out of funding, and if they don't act there will be no funding starting sometime in August and through the end of September, which means the business will slow down; and then it picks up again October 1 when new funding becomes available.

So while there is consensus in Congress and the Senate to get more funds appropriated for SBA, procedurally it is the middle of the summer.

It's been hard for our politicians in Washington to get it done.

Maybe Don Trump can solve this problem.

(laughter)

Possibly.

Regarding the sale of the loans, if I recall, are you likely to sell the guaranteed portion of the SBA loan, which is 70% or 75% of the origination?

Is that right?

That is correct, and that's what we've been doing since we bought the company, yes.

Are the gain on sale margins around -- would you settle for 1.18%, 1.19%?

Is that the pricing you're seeing?

It's in the midteens.

Every sale is a little different, but let's say it's in the midteens.

Okay, great.

And then I believe one of your old 10-Ks -- might've been the 2011 one -- you put in that Tier 1 leverage number that you agreed to adhere to.

I think it was 8%.

(laughter)

Yes.

If I read it correctly back then, I thought it was just for like a three-year period.

Are you still in an agreement, an official agreement with the regulators that you have to maintain that?

Or is it more of a handshake that you just don't want to go near it?

Raj and I are looking at each other trying to figure out how to answer.

Like, what are we allowed to say, yes.

Whatever agreement we have with the regulators then still exists.

Great, okay; that's fine.

Then finally, on the deposit growth, how hard is it to get those non-interest-bearing demand accounts, vis-a-vis interest-bearing term deposits or the money market savings accounts?

Remembering that there's very little difference today between interest-bearing and noninterest-bearing.

It's subtle to say the least.

But look, it's a lot of work.

Those come only as a result of our private bankers and our commercial bankers mining relationships.

Those are operating accounts that come from relationships that have to migrate away from someplace and migrate to us.

Now many of those are relationships that we've all -- John is sitting here with me -- and between John and I have had up in New York for 25 years, and relationships that our bankers in Florida have had, and Tom Cornish has had in another life in Florida as well.

So those don't -- they don't just walk in.

You don't just open up a branch and people walk in and start throwing noninterest-bearing deposits at you.

That's for sure.

Which is why we spend more money on people and less money on buildings and branches probably as a strategy, and we'll always continue to do that.

One final question, John.

I remember when your private equity investors were involved in the organization, the regulators -- I don't know if prohibited is too strong of a word, but you really couldn't do business with them.

I remember LeFrak is a huge real estate guy in New York.

Are you able to do business with your old private equity guys that are no longer on the Board or owning the stock?

Yes, all of those things fell away when the private equity guys got out of the investment.

So we're completely free to do business with them.

Remember, that was pretty constraining when you consider that between Carlyle and Blackstone they own half of New York, for crying out loud.

So we are free to do business with them or any of --

And lots of Florida.

And lots of Florida as well, that's right.

Yes; that's all gone.

Great, thank you.

Lana Chan, BMO Capital Markets.

Hi.

Most of my questions have been answered; but just, Leslie, could you clarify for the third quarter the tax benefit expected and what the tax rate would be?

Yes, it should be in a similar range to what it was last year, Lana, somewhere in the $5 million range.

And we're looking at an effective tax rate for the third quarter of probably 26%, 27%.

Great.

Thank you.

I think Tom mentioned a couple times Shared National Credits.

How big is your exposure to SNCs?

No, it's -- these are not what you would normally think of as Shared National Credits.

These are syndicated credits that were larger Florida companies than we wanted to deal with on our own.

We refer to them as Shared National Credits because some of them are national companies.

But I don't know what our exposure is there.

It's very small, less than $1 billion.

Okay, thank you.

Dave Bishop, Drexel Hamilton.

Great.

Good morning.

Hey, most of my questions have been asked as well.

But, John, if we look at the deposit composition of Florida, I don't know if you have this number available; but what's the percentage there of noninterest-bearing DDA versus maybe the New York deposit base?

And what's the opportunity there to grow that segment?

Yes, we're -- hold on.

So noninterest deposits in Florida, about $2 billion; noninterest deposits in the York about $600 million.

Now that is trending toward change, because the deposits that are growing in New York tend to be 90%, 95% commercial.

So over time that will change, meaning that New York will get even better.

But we don't expect that Florida will get worse over time.

So Florida is still -- we should make it clear that Florida is still a very, very important market for us, both for assets and liabilities, and we have great expectations for Florida over the next couple of years.

We have great expectations for New York as well, but we don't want to downplay Florida.

It is impressive in its recovery.

It is broad-based now in its recovery.

The real estate recovery is different from other real estate recoveries that we've seen in Florida.

There is more commercial businesses coming to Brickell Avenue in Miami than we've ever seen before, and there is way less leverage in the state in general in real estate than there was.

So Florida is an impressive market, and we don't mean to -- just because we keep talking about New York and the opportunities in New York, we don't mean to imply in any way that Florida doesn't represent great opportunity for us in the next couple years.

Hey, John, could I clarify the SNC question for a second?

Sure.

Yes, the overall commitment base in Florida for Shared National Credits is just about $1 billion.

And of that $1 billion about $400 million are credits that we actually lead, that we typically view as club deals because we're the agent and it's a small number of banks; but from a regulatory perspective they're actually classified as Shared National Credits.

So the commitment level is about $1 billion.

The outstandings are about $650 million.

And our outstandings are predominantly focused about 50% on credits that we are actually the agent bank.

And if you could -- going back to our earlier conversations about loans in Florida, you can see that over time it is our -- it would be our choice to replace some of these with the smaller loans that are coming directly from the market that we are now seeing tremendous demand for in those tertiary markets like Tampa and Jacksonville.

So it's not a big piece of what we do, but we certainly don't expect to grow that; in fact, probably shrink it.

Thank you.

That does conclude our Q&A session for today.

I would like to turn the conference back over to Mr. John Kanas for any closing remarks.

So, in summary, about as expected this quarter.

We are where we thought we would be when we sat down and talked to you at the end of the fourth quarter last year and talked about what we thought 2015 was going to lay out like.

Probably maybe a little bit more growth in New York than we expected to see.

Solid economic growth in all markets.

Waiting to see when the -- look, with everybody else, what happens with the Fed and when it moves and what the impact will be on us as well as the industry.

Generally view that as a plus.

And while we did not expect any help on the margin line as a result of rising rates, it is entirely possible -- and some in fact believe probable -- that we will get some.

So we're as anxious as you are to roll out the second half of this year, and are very, very pleased with where we sit today and look out over that really, really nice pipeline already.

It's early in the quarter and we can really already see a nice pipeline building, so our expectation levels are high, and look forward to the next report.

Thank you, everybody, for calling in.

Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the program and you may all disconnect.

Have a great rest of your day.