BankUnited Inc (BKU) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankUnited Incorporated fourth-quarter and FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to hand the meeting over to Mary Harris, Senior Vice President of Marketing and Public Relations. Please go ahead.

Good morning and welcome. It's my pleasure to introduce our President and CEO, Raj Singh. 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, continues, may, well, 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 risk or 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 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 ending December 31, 2015, available at the SEC's website which is SEC.gov. Raj?

Thanks, Mary. Good morning, everyone. Thank you for joining us. This is Raj here with Leslie and Tom. You all know Leslie, she's been with us for a few years now as our CFO. You've heard about Tom but you have not met him. Tom Cornish has been with us -- three years, Tom?

Three years.

Three years, our Chief Operating Officer. I also bring greetings from John Kanas who is in Florida on a golf course, probably on a Trump golf course, if I was to guess. And he says hello. I spoke to him yesterday, he wanted me to send a hello to everyone.

I'm happy to announce our fourth quarter-results. EPS came in very strong; earnings came in very strong. We posted a $0.59 quarter. For the year we came in at $2.09. Earnings net income was at $63 million for the quarter and $226 million for the year, round numbers.

I think this is our highest-earning quarter in our history as a Company. So I'm very proud and very excited to be where we are today. We may have had a couple of quarters with a six handle from an EPS perspective way back in 2010 or 2012 or something like that, but from an earnings point of view this is our biggest quarter.

It feels kind of strange. Just yesterday we were talking about how earnings are declining because of loss share asset, all the headwinds that we have from the decline of that asset. And we were about to get to an inflection, and we got to an inflection. And the question always was how long will it take to really ramp up earnings; at the end of the day it's an earnings game.

I know you all patiently waited for this but eventually we are at the place where now we are posting quarters not yet a six handle on EPS, but very close to it, and it feels very gratifying to be here. And especially as we look at earnings trajectory going forward, I feel very good.

Let me take a minute here, talk a little bit about the economic environment, both in our market and in general. I will start by saying simply, wow, what a difference two months can make. Just two or two and half months ago we were in a very different place politically and economically.

Today we have a new administration which is not even a week into the office and we are talking pro-growth policies and tax reform and business -- and personal tax reform. We are talking the reduced regulatory burden, not just for banks but for all American businesses. We are talking infrastructure spending. All things which basically lead to better consumer confidence and business confidence.

And confidence, at the end of the day, is a field that is needed for economic growth. And economic growth is good for us as a bank, it's good for every bank that you guys follow. So we couldn't have asked for better news on the economic and political front. Of course this is all still talk and it will take some time for these policies to actually trickle down but we are very optimistic about the future.

Getting back to our fourth-quarter numbers, like I said, earnings were very strong. Deposit growth was pretty decent; that came in at $655 million versus I think it was just over a tad over $600 million last quarter. As you know, that is our focus and we are not satisfied with what we have; we still have to build this to a much larger number. We are confident that we are moving in the right direction with that.

Interest-earning assets also grew about the same amount. Loans grew $432 million, which was a very light quarter for us based on what we have done in the past. And I'll walk you through what makes up that lightness of that growth.

A minute ago I talked about how there's a lot of good news on the economic front. There's also a fair amount of volatility, at least in the short term. That seeps into our numbers and I'll walk through that in some detail.

Our biggest business line is commercial real estate, as you all know. In commercial real estate we started applying the brakes in early third quarter. We announced it to you in the second-quarter earnings release. You saw some slowdown last quarter; you're seeing a full slowdown right now. That is coming directly from the concern that we hear from the OCC, our primary regulator, about the state of commercial real estate and where we are in the business cycle.

So we are seeing attention to that and we have applied the brakes on that business. We are still growing it but not nearly as fast as we used to. And being the largest business line, that has a large impact on our total loan growth.

We also had a pretty interesting development in the fourth quarter around corporate tax rate, the guessing game of what the corporate tax rate will be, which directly impacts our tax-exempt business. That's Pinnacle which has been very steady grower from the day we started that business six, seven years ago. From the day after election I don't think we've done much business there, simply because we changed our pricing models to take into account a lower tax rate.

Some of our competitors have not done that. We have -- our pricing has moved away from our competitors and we've lost a fair amount of bids in that business. That also has impacted some tax-exempt business that we do in New York and to a much smaller extent what we do in Florida C&I as well.

Also right after election rates spiked, which has caused the refi boom to go away which impacts our mortgage warehouse customers. While the warehouse business has been growing very nicely all throughout last year, fourth quarter it basically plateaued because while we have a pipeline of nearly $300 million in approved credit, they have not closed. Most of them will close this quarter. But that was also a direct result of what happened in the environment of volatility that it created.

Lastly, probably the smallest impact but I want to mention it, is we are seeing very tight pricing in the leasing business. We've been trying to hold our line and be disciplined about pricing. That impacted that business specifically.

Probably coming out of -- we are seeing less competition in CRE, both in Florida and New York. And banks are, needless to say, are looking for the next asset class to chase and we are seeing competition in these commercial finance businesses.

Moving on, I wanted to take a couple of minutes to talk about 2017. We always give you guidance. I'll give you some guidance and Leslie will give you the rest, the details. The guidance I will give you is on deposit growth, what we are expecting for this year.

Talking about, first, last year we did about $2.6 billion of deposit growth and about $3 billion of loan growth. Our goal this year is to do $4 billion of deposit growth, an equal amount of interest-earning growth and loan growth up about the same as we did this year.

Now that, in terms of how much loan growth we do and how much bond growth we do, we want to maintain the flexibility of doing what makes sense. There have been times, especially earlier this year, where bonds made a lot more sense and we did very aggressively grow the bond portfolio. Not sure that opportunity will be there in the future or not, but our best guess is it's probably $3 billion of loans and $1 billion of bonds, with $4 billion of deposit growth.

We expect every line of business, as we stand right now and we look at our plan for the year, every line of business will grow, adding up to about $3 billion. But we always said to you we always are turning the spigots off and on based on where we see best pricing and best returns. We will continue to do that but as of right now every business line is expected to contribute towards that growth.

With that, I actually -- let me see -- I do also want to point out, Leslie was showing me this morning our tangible book value which we don't talk about that much, but is now at $22.47. We were sitting here just before this call started, talking about when we took the Company public we were under $13. Somebody did the math really quick here on the back of an envelope and it's about a 10% cumulative annual growth rate from the time we went public which is just about six years ago. That's on top of paying a pretty healthy dividend of about $0.84 that we've been paying for a number of years now.

So we've come a long way in terms of a Company which was essentially a startup a few years ago, went public, and here we are. We've matured quite a bit. It's very nice to hit an earnings target like this one which is important; psychologically it's important. With that, I will actually turn it over -- Tom, you want to go next and talk about a little more detail behind the lending?

Sure, thanks, Raj. In terms of the loan portfolio, our portfolio number remains well diversified across the platform. It's always been our strategy to keep a well-diversified portfolio. It's 35% in Florida at $6.5 billion, 34% in New York at $6.4 billion and 31% in the national companies at $5.9 billion.

To expand a little bit more on Raj's comments about growth for the quarter, from a loan and lease perspective Florida grew $176 million. The New York market grew $106 million. And our national businesses grew $150 million which was primarily on the residential side.

The Florida growth for the quarter was predominantly in our core C&I businesses or corporate banking and business banking businesses which had a good quarter. And that type of growth is in alignment with our strategies for growth in both the New York and the Florida markets from a C&I perspective.

The national businesses were relatively flat quarter over quarter for the reasons, from the pricing perspective that Raj alluded to. And on the deposit side we grew deposits by $655 million for the quarter which was well diversified across all business lines and all geographies. So we were pleased with that type of growth. Leslie?

Okay. I'll jump in and give you guys a little bit more granular detail about the quarter and also a little bit more guidance looking forward to 2017. We're happy to see that net interest income continues to grow, increasing by 17% year over year. The yield on new loans increased for the most recent quarter to 3.54% and the yield on investment securities increased to 2.87% while keeping that duration under 2% so we are very pleased with both of those results.

NIM for the quarter was 3.67%, 3.73% for the full-year which is right in line with the guidance we've been providing you. Pricing on new loans looks like it's beginning to tick up but I wouldn't say we are seeing anything dramatic yet. Cost of deposits was 69 basis points for the quarter, up 2 basis points from the prior quarter. And the cost of FHLB advances declined to 92 basis points from 113 for the comparable quarter of the prior year.

Increase in non-interest expense for the year is right in line with our high single-digit guidance at 8.3%. This quarter non-interest expense was impacted by one unusual item, we disclosed in our press release a $4.1 million impairment that we recognized on a group of 150 tank cars that have some unique physical characteristics related to a required retrofit. And that was really what drove that.

Non-covered loans represent 70 basis points -- non-covered, non-performing loans represented 70 basis points of total loans at December 31. But I want to remind you that 32 basis points of that was the taxi portfolio. So outside of the taxi portfolio that's relatively consistent with the prior year end.

I'll give you a few details, updates around the taxi portfolio because if I don't I know you ask me, so I'll go ahead. Exposure now stands at $178 million, down from $192 million at 9/30 for a reduction of $13.7 million. About half of that reduction was charge-offs. We did take about $6.9 million in charge-offs in the fourth quarter. And the other half was pay downs. To date in total, $65.9 million worth of taxi loans have been modified in TDR; $7.4 of that was this quarter.

Medallion values, based on our updated analysis for the fourth quarter, individual medallion values we have constant. And corporate value came down, but only very, very slightly. So we are encouraged to see what is beginning to look like maybe some stabilization there.

Delinquencies 60 days or greater is up to $33.8 million at December 31. This is exactly what we predicted when we spoke to you last quarter, primarily driven by the migration of that one large relationship that we talked about last quarter.

Charge-offs to date in the taxi portfolio total $11.1 million, and $6.9 million of that we took in the most recent quarter. The reserve allocated to medallion loans is down a little at 6% at 12/31 compared to 8% last quarter. And that reduction is entirely due to the fact that we took all those charge-offs.

77% of the portfolio is rated substandard at 12/31. That's up just slightly from 74% at the last quarter, so some migration. But the pace of migration there seems to be slowing and we are encouraged to see that.

So moving on from taxi, with regard to capital, given the projected rate of balance sheet growth and the amount of capital we are projecting to augment through earnings, we are likely looking at doing some kind of capital raise in 2018. It doesn't look like we are going to need to do that in 2017. I wouldn't take late this year off the table, but more likely you'll see something in the first half of 2018 at this point. And you can expect us to maintain our current quarterly dividend of $0.21 for the foreseeable future.

That capital raise will be debt.

Yes. And as it stands now we are still looking at that next capital raise being debt.

Some additional guidance for the year. Raj provided you with some guidance around growth in deposits and earning assets. To expand on that, I would say based on what we see today securities are projected to grow as a percentage of total assets, as deposit growth is projected to exceed loan growth and the loan-to-deposit ratio is expected to pull back to under 100%.

Combined covered loans in the indemnification asset are projected to continue to decline at a pretty consistent pace. Based on our most recent cash flow forecast, I'd expect that runoff to average around $70 million to $75 million per quarter.

Also, and this is good news, I've been waiting years to say this, based on our most recent cash flow projections we think the combined yield on the indem asset and the covered loans is finally going to start ticking up. I've been waiting a long time to be able to say that. And we think it will probably ramp up to around 14%, 14.5% for the full year of 2017. And that will ramp up gradually over the course of the year.

And I'm also happy to say we finally think the amount of amortization of the indem asset is going to go down now. Hopefully that materializes the way our current cash flow forecast indicates. We expect continued growth in net interest income, although the NIM will remain under pressure because of the runoff of the covered assets. I think NIM will land between 3.4% and 3.6% for the full year, most likely near the midpoint of that range.

Just for clarity, our projections are based on a probability weighted consensus forward curve in place as of early December which is when we ran them. That prediction incorporated two rate hikes by the Fed in 2017. The curve was fairly flat through the belly and reflected some flattening of the 2-10 spread. So a steepening curve would certainly improve that picture.

Credit-wise we don't see any at systemic deterioration in credit on the horizon; things seem pretty stable. Consistent with what we've previously stated, we do expect the ALLL to gradually increase as a percentage of loans over the course of 2017. We saw that tick up about 4 basis points in 2016 and I would expect that upward trajectory there to continue.

We also expect the net charge-off rate to gradually increase as the portfolio seasons. We were at 13 BPS for 2016 and that will probably gradually ramp up, not because of anything we see going on that's negative, but just normal and natural seasoning of the portfolio.

Operating expense growth should continue at the high single-digit rate for 2017. Most of that increase will be in the comp line as we continue to add to our deposit-gathering teams and supplement our back office support around both the deposit and loan teams.

We are currently projecting an ATR of just under 33% but that doesn't take into account, obviously, anything that might happen in the way of corporate tax reform. So with that, I will turn it back over to Raj for some closing remarks.

Thanks, Leslie. So I will end by repeating what I said at the beginning. We are very optimistic about the future. We are very happy with the earnings performance this quarter and looking out into the future as to what we predict the earnings trajectory to be.

There's work to be done on the deposit front. The loan growth this quarter was a bit of an anomaly in terms of how light it was. We are expecting this to be a one-time event. As we see more novelization on the CRE front in terms of regulatory attitude towards it, we could see significantly higher numbers in CRE going forward, especially the second half of the year. With that I -- that was it, those are my bullet points. We will open it up for questions.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

Good morning, everybody.

How are you, Steve?

Good. Raj, you had cautious comments again on commercial real estate this quarter. A couple of questions there: With the $3 billion of loan growth you are guiding to, how much of that is for commercial real estate?

We were actually talking about it just before this call, as to how much to break down this guidance, and typically we have not done this. Let me just say that there is growth in the CRE portfolio for each quarter. It's not as if we are keeping that business line flat or taking it down. We expect it to grow, just not as much as we've done in the last couple of years.

Okay. And there were a lot of banks reporting today, so excuse me, but where did we end the quarter on concentration of commercial real estate loans?

288%.

288%? And can you cross that level here? Or do you guys need to further invest in risk management and other areas before you could cross that?

Steve, where we are on that is, the last six months we've made significant investments in the infrastructure and process, actually process changes more than anything else. But we are still waiting for the OCC to come in and do an exam, and tell us that this is what they like, which is probably at least another quarter away.

It's fair to say we'll probably manage to that 300% for at least a couple more quarters.

Yes, at least for a couple more quarters.

Okay. And then separately, on the deposits, Raj, where were the balances from that, the team lift-out, that you guys had done? And what are your expectations for them for 2017?

When we had brought them in, we'd sat down with them and done a three-year business plan, the best guess of what we think that business could do. I reviewed them about a week or 10 days ago and they were within $30 million of what they said they would do, which was several hundred million in 2016, which was their stub year. And the number is much higher for next year, which is why I feel comfortable giving you that $4 billion guidance.

Okay. But could you get to that deposit guidance with this team and your other teams already? Or do you need to add more deposit capacity to get to that level?

With the teams that we have, I would say we are always looking opportunistically to add. But it's not like we can not do this unless we find another team like this or another business like this.

In New York, for example, we are currently talking to at least two teams to bring in. And that's our, what I call, normal hiring that happens all the time. It's not some giant team of eight or nine people; it's basically three people that we are talking to, and we will bring them on.

But we are also -- it's not out of the ordinary; it's not like that lift-out we did last year. That was a pretty big effort; that was a pretty big -- it was a new business line that we were launching. There was a lot of IT spend that went into it and effort that went into it. So it's not that; it's just hiring more producers like we do in the ordinary course of business.

Okay. Great, thanks for all the color.

Thank you.

David Eads, UBS.

Hi, good morning. Following up on the loan growth comment, it sounds like a little bit of near-term headwind for CRE and then also some of the headwinds you talked about in the national portfolio. Should we be thinking about the trajectory in 2017 being, if the pace of growth ramps during the year, is meaningfully stronger in the back half?

I think that's a good assumption. I actually forgot to add one thing -- or maybe I did. We did have about $50 million in participations -- pretty standard stuff that we do. We look at our portfolio. We participated out about $50 million in loans, which also goes against that growth number.

But again, there was nothing special about it. We look at our portfolio all the time, and we prune it where we think there is excessive risk. So that also went into fourth quarter. You're absolutely right that you should expect growth to be skewed a little towards the second half of the year.

All right. And then, Leslie, a good update on the expected net yield on the acquired portfolio. Can you go through some of the dynamics of what caused that yield to go up? Should we expect that yield to be flat or higher for the life of those assets? Obviously, the balance will be coming down over the next few years -- continue to come down. But should the yield only go in the upward direction? There's not going to be a cliff downwards in the next years? Is that the right way to think about it?

Yes, based on everything we know today, that's the right way to think about it, yes.

Okay. I'll stop there, and thanks for taking the question.

Ebrahim Poonawala, Bank of America.

Good morning, guys.

Hi, how are you?

Good. First question, Raj, I was listening to your initial opening remarks around earnings hitting a record and fourth-quarter EPS at $0.59. I think, reading between the lines, the implication that we should expect first quarterly EPS trajectory to be higher going forward from the $0.59 number in 4Q?

I think, Ebrahim, the point I was trying to make was, at the end of the day, it's all about earnings. You want earnings growth, and that's what we are trying to focus on, earnings growth.

This year, put aside the quarter, even if you take the entire year, we had double-digit earnings growth. We had double-digit EPS growth. We had double-digit revenue growth.

Of course, we've always had double-digit balance sheet growth. And that's something to feel good about. That's the point I was trying to make. And the point I will make is, focusing on profitability, that is our number-one priority.

Understood. So we could have some quarterly earnings volatility; it's not necessarily that we get to $0.60-plus right off the bat in 1Q 2017?

That is correct. Also, we've never given earnings guidance. And the reason we don't do that -- we give you guidance on things that we can control and that we can foresee with some certainty. Ends up being -- a lot of it is in our control, and a lot is not in our control.

Pricing, shape of the curve, the absolute level of the curve has a pretty meaningful impact to our earnings or any bank's earnings. That's why we generally stayed away from that. But we've always given you balance sheet and expense growth, things that we can somewhat control.

The other thing I would say, we've continually tried to encourage you guys not to focus on quarter by quarter, because things can happen in any given quarter that create volatility. We are trying to be more focused on long-term trends than just one quarter to the next.

Our EPS fourth quarter to fourth quarter was up 13.5%. But our earnings over the course of the year was up 10% or 11%. I would actually focus on the fact that our EPS over the year was up double digit rather than just taking one quarter.

Quarters can be volatile.

Yes, quarters can be volatile.

All right, that's helpful. Switching to, in terms of things that you can control, I think part of the pieces around this national team coming in and growing the depositors, yes, the deposit growth should pick up. But also that deposit costs could go down because of the mix shift in deposits. Can you give a sense of -- we might get multiple rate hikes this year, but when we think about your cost of interest-bearing deposits, is it fair to assume that we could actually see that trend lower as the mix improves? Or is that being too optimistic?

Relative to the Fed funds.

Relative to the Fed funds is what Leslie is saying. Listen, when a team comes in, no matter whether it is deposit team or loan team, they don't come in and start selling the most profitable product. They have to come in and build momentum. So if I look at the mix of deposits that the team has brought in, or that business, it looks skewed towards money market right now. Over time, the expectation is that will change, and there will be a lot more DDA that comes in, which is exactly on target.

But we are in a very different rate environment. You had one Fed fund hike just a month ago, and we are expecting probably three more this year. So in an environment like that, your cost of deposits will go up.

The question is how much does it go up, and what's the beta of these deposits? We've answered that question in the past, which is, we think the deposit beta -- and there's a big think over there -- is in the 50%, 55% range. But nobody really knows for sure exactly what it will be.

When in December 2015 the Fed moved for the first time, we got one phone call from a large depositor. This time around, we got a lot more than one, but it's not like everybody's calling. But by next December, if we have two more or three more moves, I'm sure a lot more customers will be calling.

So, deposit pricing in a rising rate environment will go up. The question is how much does it go up relative to the Fed funds?

That's helpful. And if I may add one more, in terms of taking your comments around growth could be skewed towards the back half of the year. And you talked about changes in regulatory attitude could lead to maybe stronger CRE growth. Getting to that $3 billion-ish loan growth for the year, is that based on expectation that the regulators sign off on the work you've done in terms of being able to cross the 300% threshold? Or regardless of what happens there, you expect that $3 billion is achievable today?

We always go with the most conservative view, which is we will stay under 300% and hit $3 billion.

Understood, very clear. Thanks for taking my questions.

Stephen Scouten, Sandler O'Neill.

Hey, guys, good morning. How you doing?

Good morning.

I don't want to harp on the loan growth guidance, per se, but I just wanted to follow up on some things. I know last quarter you had said you guys would be a little more selective, and I think we saw that this quarter. But you also mentioned that the mortgage warehouse could be an offset to some of the decline in New York's CRE. So, with the slowdown you intimated to in that business, where do you feel like specifically you will be able to make up for those two dynamics within CRE and the mortgage warehouse, if that makes sense?

The mortgage warehouse is not a slowdown as if that's not going to happen; that was more of a delay. So the pipeline over there is the biggest that it has been. I think we have close to $300 million in approved loans. Actually, Leslie is pointing, waving to me saying it's more than $300 million. But if I see fourth quarter, we didn't really close any commitments.

And what happens in that business is, think about if you're a mortgage company and suddenly your pipeline suddenly disappears, or at least half of it, the refi portion disappears overnight, which is what happened in November, the last thing you are looking for at that time is to close another warehouse line. And they are distracted.

But going forward, those loans that are in the pipeline, I still expect most of them to get closed this quarter. The business generally runs in a fashion that if you close a loan today, it generally takes about a few weeks for the lines to be drawn. So, I expect a bunch of those loans and commitments to come on board this quarter and outstandings to grow next quarter.

If rates back off and go back into the low 2%s, you could have again a lot more momentum with our customers and you could see much more aggressive growth. So I'm not writing off mortgage warehouse lending. We are expecting that business to grow quite strongly this year.

CRE, it will be slow. CRE now we are also seeing some concerns coming out of the New York market. As rates have moved, everyone's now talking about are the cap rate's too low in New York? Florida cap rates have always been higher; New York have always been lower. But now suddenly, not just the regulators, but we are hearing this in the marketplace.

So while refi activity has slowed down in New York, purchase activity has slowed down in New York. So we are not feeling that bad about slowing CRE six months ago; rather be cautious than put on all these loans in this environment. It's okay to go slow with CRE, especially in New York. But overall, our goal for the year is to grow CRE just like we shoot for growing every single line of business.

I might add that our core C&I units in both the New York and Florida market had very good years last year, had good fourth quarters. And we expect to see that to continue to grow well into 2017, and the pipeline in each of the units looks very good.

Okay, that's really helpful, thanks for that. And then just one more for me: If you could talk a little bit more about the effect of the potentially lower corporate tax rates. I know you mentioned some of your tax-advantaged businesses, the business had dried up there due to some pricing changes.

Can you talk also about where your effective tax rates could go under some of these potential scenarios? And what the net benefit you expect to be versus some of the near-term hits to tangible book value, if you have any of that math?

Sure. First of all, Stephen, there's obviously a lot of uncertainty about exactly what this is going to look like when it gets done. So with that being said, currently our ETR is slightly below the federal effective rate. And I would expect that, based on the analysis we've done, that's where it will land. If the federal effective rate is 25%, we will be a little below that. If it's 20%, we will be a little below that.

Now, there are some unanswered questions about will municipal obligations, for example, continue to be tax exempt? What will happen to existing low-income-housing tax credits? None of that has a huge effect on us because we don't have that much tax-advantaged income. But those could play with that in a way that I wouldn't consider to be material, but they could certainly have an impact.

As far as pricing of the tax-exempt businesses, we're just kind of waiting a little while for some clarity, for some of that to shake out, for the market to adjust. And that's why we took our foot off the brake there. That's what I would expect, is we'd still be just slightly below the federal effective rate.

Whatever that ends up being.

Whatever that ends up being.

Any earn-back? Have you done any earn-back math on the impact to your DTA or other things like that?

Honestly, that's not going to be that material for us. We are pulling DTLs as we speak; and if this doesn't go into effect until 2018, we may even find ourselves in a net DTL position. So that's not going to be a big number for us, Stephen, I don't think.

Okay, great. Thanks so much, guys; I appreciate it.

Jared Shaw, Wells Fargo Securities.

Hi, good morning. Thanks for taking my call. Could you tell us where you saw the CRE growth this quarter? And looking at the back end of the year, with the expectation for higher CRE, should we assume that you're back more in the New York City multi-family market? Or is it the rest of the franchise really expected to pick up traction?

We saw more of it in Florida. And in the short term, very short term, we are still seeing a better pipeline in Florida than in New York.

Okay. And then, are there any opportunities to get into new business lines? Now that you have taken the foot off the gas on CRE, are you looking at new opportunities for expanding into brand-new lines? Or should we expect that you just continue to stay with where you're focused right now?

That's the most fun part of my job, is to try and get into new stuff, and we always have a few conversations going. There's nothing in the pipeline that is far along enough for me to actually talk about. But we are, at any given time, having two or three different conversations with different teams or different businesses to bring them to BankUnited. But if there is something that develops, we will certainly let you know.

Okay, thanks. And then, on the railcar depreciation this quarter, is that more one-off? Or as you look at the rest of the fleet, should we expect to see some continued revaluation on the tank cars and sand hoppers?

No, we really think that's a one-off. This was a unique group of 150 tank cars that had a particular engineering issue with respect to the regulatory required retrofit. Those are the only cars in our fleet that have those characteristics. We don't see any indicators of impairment in the rest of the fleet.

Okay. And what's the remaining life on the majority of those cars under the current leases?

The remaining leases, the first of them come up in 2017, but that's not the majority of them. Most of them come due in early 2020 to 2022, that range.

Did you ask about leases or the railcars?

I think you asked about the leases; that's the question I answered.

Yes.

(Multiple speakers) yes.

Great, thank you.

I might add on your CRE questions here, I'll follow up on Raj's comment. While we have large CRE portfolios obviously in both markets, the CRE portfolio, as you know in the New York market, is more concentrated on multi-family. So, you're more driven around the economics of what happens in multi-family. In the Florida book, it is a more broadly diversified asset base and more broadly geographics. But we have a bit more flexibility as we get into the later part of the year in different asset categories.

Brady Gailey, KBW.

Good morning, guys.

Hey, Brady.

Most of my questions have been answered, but, Raj, an update on bank M&A? It seems like we're seeing a little more activity out there. You got the Astoria deal that busted. What are your thoughts on bank M&A, especially with a currency that's a little more valuable nowadays?

Better economic times, more certainty, is always good for M&A. But I think what has been standing in the way of M&A has been regulatory concerns. I don't think that has actually changed that much, or at least not yet.

The Astoria deal was busted; that's a pretty bad signal for M&A. I view M&A in three categories. I was thinking about it just yesterday. Two small, non-SIFI banks combining to remain a non-SIFI bank, that's one kind of M&A. A very large, already a SIFI bank buying a non-SIFI bank, that's one kind of deal. And then the most convoluted and difficult deals are two non-SIFI banks combining to become a SIFI bank.

We've only seen two deals, at least from what I can remember, CIT and the Astoria transaction. One couldn't get done and the other one got done, but I'm not sure the shareholders are very happy about those. So it creates much more complexity when you're trying to get over the $50 billion mark.

And you've heard us say time and time again that we would not be interested in doing a small transaction, for reasons that we've laid out in the past. We grow nicely and we are an organic growth story and we don't want to muddy that up. But any transformative deal that we do, which is a big if, if you ever do, would be one that would create a SIFI or get us very close to being a SIFI. That's problematic in this environment, from what I'm seeing.

So I'm not very optimistic, at least on the bank M&A space from BankUnited's perspective, until we see some major changes in DC. And that might happen over the course of the next 6 or 12 months, but we are not there yet.

Great, thanks, Raj.

Ken Zerbe, Morgan Stanley.

Great, thanks, good morning.

Good morning.

With loan growth, not to put you guys on the spot or anything, if you look back a year or two, loan growth was supposed to be close to $5 billion. And then, call it roughly last quarter, it was supposed to be $3.5 billion on an annualized basis. Now we are looking at about $3 billion. I get the reasons why you expect loan growth to accelerate from here, but when you think about your confidence in the $3 billion, or the range that it could end up if we end up having the same conversation a year from now, how wide is that potential range of loan growth over 2017?

I think, Ken, if you go back a year or 1.5 years ago to today, the big change that really occurred for us was in the middle of last year where we basically came to you and said we will not be just about loan growth. That was a battle cry for a long period of time when we had lots of excess deposits, lots of excess capital, and a loss share asset which is running off so fast that it was hard to keep up with.

Now, as we are into the evolution, the next chapter of BankUnited, we have to look at a lot more than just loan growth. Deposit growth is very important, and we have very publicly said that we are not happy with the level of deposit growth that we've generated. I think $2.6 billion this year was less than what it was the year before. We need to actually address that because you can't grow loans without growing deposits.

That's an issue even right now with these numbers. As happy as I am, I'm not happy with the fact that our loan-to-deposit ratio is at 100%, and still going the wrong way. Actually, no, last quarter it went the other way.

It went down.

Yes. But that single-minded focus on just loan growth and nothing else was important 1.5 years, 2, 3 years ago. Today we have to focus on loan growth, deposit growth, and look at margin. We have to look at expenses.

At the end of the day, I'm trying to work back from the bottom of the P&L up, and see what are the drivers that will drive that bottom line. Earnings growth, that's more important. Our capital is still not fully deployed. You heard Leslie talk about the fact that we are not going to do a capital raise this year, probably in the first half of next year. And that will be debt. Our equity capital is probably still 2.5, 3, 3.5 years away from needing anything. So we still have to grow our earnings to get our return on equity to a better place than where we are at.

And we've always had this excess capital issue. For the longest time, we've been a Company with lots and lots of excess capital and lots and lots of liquidity. Liquidity is all used up; we have to generate new liquidity. Capital is still there, and we have to deploy it carefully into the highest-yielding assets to build earnings.

Okay, that's helpful. And then for myself and everyone else, can you explain again Pinnacle? What product Pinnacle is actually selling? And why should that -- I think you mentioned on the tax exempt side, but why should that pick up, if at all, before we get any kind of resolution on the tax guide? Thank you.

So, Pinnacle, their primary product is leases, financial lease, the leasing equipment. And equipment comes in all shapes and forms, from short-term, one- and two-year deals, all the way to five-, six-, seven-, 10-year deals.

So what we are going to do, and I don't want to broadcast too much to our competitors, but we are going to look at pricing a little differently for short-term assets versus long-term assets. And that's where you'll get some volume, though maybe not as much volume as we used to get in the past. We don't want to put on tax-advantaged assets that are very long-dated, and find out the tax rate has changed on us a year into the deal.

Ken, I think it may be a while before tax reform gets done, but I would not be surprised to see the market respond to this in a more fulsome way than it did last quarter in the first month after the election.

All right, great, thank you very much.

Dave Bishop, FIG Partners.

Good morning.

Good morning. Dave?

I show his line is still connected. Dave, we were able to hear you.

We can't hear him.

He may have muted. We can move on. Erik Zwick, Stephens.

Good morning. Thanks, all of my questions have been answered at this point.

That concludes our question-and-answer session. I would like to turn the conference back over to BankUnited for any additional comments.

Thank you for joining us. We are very excited about what lays ahead for 2017. I'm sure you will have more detailed questions. Feel free; Leslie is here to answer your questions. Or if you want to call me, you can call me as well. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.