BankUnited, Inc. (BKU) Q2 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the BankUnited Inc. Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the call over to your host Mary Harris, Senior Vice President of Marketing and Public Relations. Please go ahead.

Good morning, 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, continues, 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 prospect, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize or if the Company's underlying assumption proves 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, 2015 at www.sec.gov. John?

Good morning everybody, we’ve managed to turn in another solid quarter as you have seen this morning almost $57 million or $0.52 a share at or above most analyst expectations compared to $46 million and $0.43 a share for the comparable quarter in the prior year. So earnings for the six months have amounted to about almost $112 million or $1.03 a share versus $93 million last year. Net interest income continues to grow, increasing about 19% for the six months ended in June as compared to last year. Earning assets that is both loans and investment grew by $1.06 billion in the quarter, $1.02 of that was loaned about $400 million of that from Florida, just shy of $400 million of that from New York and just shy of $400 million came from our national platform. Deposits, we had healthy deposit growth in the quarter of just under $720 million and deposit growth was spread relatively equally as well between the North and the South. Despite all of the talk about how deep we are in the economic cycle and all of the things that we’re warned about, our asset quality indicators remain very favorable. We have yet to see any signs of credit deterioration or asset quality issues in any of our portfolio segments. So with the exception of taxi medallion, which Leslie will talk to you about a little bit later, we put up some more reserves to that again this quarter. As we are seeing the financial position of our borrowers coming in strong as they have - within the first six months of this year turned in their financial statements expressing their performance for 2015 and that by the way is consistent both in Florida and in New York. Non-covered non-performing loans were just 32 basis points of total assets as of the end of June. So, very pleased with the quarter, we’re very pleased with the general direction as we head into the second half of the year. But we are caused to pay attention to what's going on in the world around us, the operating environment for banks is no secret is getting tougher and tougher, new regulation and requirements under Dodd-Frank have made it more and more expensive to operate, interest rates are at, what at 230 year low and we have never been in this territory before. All of these things cause us to sit around and think about the growth trajectory of our company in the future and where we want to put our money to work. Regulators have been very public about this subject and you have heard me say before that we are very sensitive to our relationship with regulators, since it is probably the most important thing, it’s probably the most important asset that a bank has today. We have found, particularly in New York and in the commercial real estate business in Florida as well very overzealous competition in the lending side. We told you last quarter that we will continue to grow loans briskly as long as that translates into more profitability but when we see the lending environment get crazy that we wouldn't be afraid to back off and we are - that is on the table for us for the second half of this year. Let me read you something that the Controller just put out there - the OCC put out their semi-annual risk perspective just last week, the Controller said that commercial real estate portfolios have seen rapid growth particularly in small banks. At the end of 2015, 406 banks had CRE portfolios that have grown more than 50% than the prior three years. Of note, more than 180 of these banks have more than doubled their CRE portfolios during the past three years. If this is - this is the operating sentence and we are actually seeing this on the ground. At the same time, we are seeing this high growth, our exams found looser underwriting standards with less restricted covenants, extended maturities, longer interest only periods, limited guarantor requirements and deficient stress testing practices. The regulators are being very upfront about this, these are public documents we're reading about it more and more every day. And so it is causing us to - we're taking a look at what regulators are saying and we're comparing it to what's actually happening on the ground and we are most likely going to put our foot off the gas pedal a little bit in the second half with regard to loan growth. We have great expectations for deposit growth in the second half, but we are going to operate with a new level of caution as we go into the balance of the year. Margins across the industry are strained, competition is fierce and we don't really need to grow loans as aggressively as we have in the recent past in order to hit our target EPS number. We are very pleased with our ability to make this selection, remember that you've always heard me say the extent to which we will grow loans is entirely within our own control because we have New York, we have Florida and our five subsidiary companies, all of which provide us with more loan demand then we need. So it is a time when we can get more particular about loans, we are beginning to see although it in the very early stages an opportunity to actually increase pricing in some areas as a result of other banks pulling back in these areas serious as well. So, we should – I’ll let Raj and Leslie talk a little bit more about their sections and then happy to answer questions about my comments later on in the presentation. Raj?

Thanks John, good morning everyone. As John said deposits grew $720 odd million, the deposit growth was nicely spread out between Florida and New York, Florida grew about $421 million, New York grew about $297 million. The national business line that we talked about last time was indeed launched in I believe end of April, the team is on board, the business infrastructure has been laid down, products are being developed. We have not booked any business yet, it takes a little bit of time to get the right infrastructure in place, which is what we’re doing. This is something we’re going to build for the long term and will take our time to build it, but we do expect a fairly healthy amount of business to be done in this business line over the course of second half of this year. So hopefully we will have numbers to talk about next time when we talk to you. Loan to deposit ratio stands at right about 100%, as we've said in the past, our business plan shows us going tad over 100% and we’re comfortable with that, ideally we’d love to stay under 100, but if we get to 105, 110 that's okay but we’re focusing more and more on deposit growth as John said as we get more cautious with loans given the statements coming from the regulators and just the general volatility in the economic, you know, with all the economic uncertainty we’ve had we’re focusing more on deposit growth. Deposit growth of $700 million or so this quarter versus $1.02 billion of loans ideally we’d like to bring the deposit growth up closer to our loan growth. Deposit pricing remains competitive especially in Florida, cost of deposits is at 66 basis points for this quarter compared to 63 basis points. The cost to funds that we do expect out of our national business line should be lower, but like I said it's something we will be able to bring to you over the course of next couple of quarters. Normally, I talk about the taxi business, I'm actually going to have Leslie talk about that, we’ve put that in her section but the highlight is nothing new to talk about, a little more reserves, a slightly smaller portfolio as amortization occurs but no new news over there either. I want to take a second to quickly talk about the national businesses that we have other than the deposit business. Clinical now stands, which is our - clinical is our municipal finance business leasing business, it stands at $1.02 billion today. Bridge, the small open finance business we have is about $450 million and the transportation equipment finance business also under bridge is at $970 million, which includes about $480 million in operating leases. We've had some management changes we've made recently at the Bridge. We're very excited about the future growth that we expect in that business. The warehouse business which is now a little over two years old, finally is coming very nicely, we grew that business, outstandings are at about $280 million this quarter. I think they were about $100 million last quarter, so we've had some nice growth in that business. The SBF business which is our most recent add to our national portfolio and it’s been part of the BankUnited family for a little more than a year. We are expecting about $220 million of volume in that business this year. Again, it's been with us for a year, we tend not to grow things very quickly right out of the box, we like to be in the business for a year or two before we really grow but the plan is over time as we get more comfortable as we go through an examination cycle or two, we will then grow that business as well but it's doing very well, it’s up from what it was doing when we bought it and we will continue to hire BDOs and growth that business nicely over time. On the M&A front, really quick not much to talk about. M&A business as you know is nice to have for us not a need to have, while we look at the number of things, we are very selective in what we want to buy and we’re in no rush to get to $50 billion. So with that I’ll actually turn it over to Leslie and she can talk a little more about the numbers.

Great, good morning everybody. As John said, solid quarter from an earnings perspective. We continue to see growth in net interest income with an increase of $33 million compared to the second quarter of 2015. As expected in this rate environment pressure on NIM continues, NIM declined to 3.75% this quarter from 3.83% for the immediately preceding quarter and 3.95% for the comparable quarter of 2015, nothing unexpected about that, again primarily due to the continued increase in new loans as a percentage of the total portfolio as well as the cost of the senior debt that we issued late last year. Yield on new loans is holding relatively stable in the mid-threes. The cost of interest-bearing liabilities ticked down slightly to 93 basis points this quarter from 95 basis points for the immediately preceding quarter. The driver of the increase over the 82 basis points we saw for the prior year is primarily again the senior notes that we issued late last year. Provision this quarter up to $14.3 million compared to $3.7 million for the immediate preceding quarter and the increase is primarily related to higher loan growth for the quarter, we also added about $3.5 million to the reserve for taxi medallion loans. I’ll give you a little more color around the taxi portfolio as Raj said, the total exposure now stands at around $200 million, down from $205 million at 3/31. I remind you that that represents just over 1% of loans and less than 1% of our total assets and also remind you that about 95% of that portfolio is in New York. As expected, we are continuing to modify these loans to-date about $29 million as taxi medallion loans have been modified in TDRs and about $11 million of that was done in the second quarter. Overall, there hasn't been much change in credit quality indicators for the portfolio in terms of DSC and LTB from what we spoken to you about before. We saw a little further migration to this substandard category this quarter but that was related primarily to a couple of larger relationships. Delinquencies are now up to $16.5 million compared to $13.3 million at 03/31 and our reserve is up to just over 7% and it was sitting just over 5% at 03/31 and that increase really corresponds to the uptick in substandard and delinquent loans. Other than taxi we aren’t seeing any deteriorating trends in credit quality, overall as expected we have seen very little variability in the ALLL as a percentage of loans and we don't expect that to change materially in the near term. With regard to capital, as we previously said as the balance sheet grows we will eventually find ourselves needing to augment capital. In terms of timing, we are going to be watching our pace to growth, the market, what's going on in the economy, what's going on in the political world and we'll do something when the time is right trying to balance all of those - all those factors and we really haven’t circled a specific date on the calendar yet. Looking forward to the rest of 2016, we expect continued NIM compression. On the last call, I think we guided to a range of 3.6% to 3.8% for the full year, given where we see the yield curve today and what we see happening there probably be towards the lower end of that range. We continue to project non-interest expense growth excluding the FDIC asset amortization in the high-single digit. As I said not seen anything that would lead us to predict material changes in the level of the ALLL as a percentage of loans or in the level of non-performing assets. Even though with somewhat lower growth projections that John alluded to we still anticipate increasing EPS in the back half of 2016 and we are not worried about our EPS estimates for this year. That's all I've got, I’ll turn it back over to John for any closing...

Leslie I just want to clarify when we say capital we’re so talking [indiscernible].

Absolutely yes, good point Raj.

That summarizes our comments, let's take questions. Operator?

[Operator Instructions] Our first question comes from Brady Gailey with KBW. Your line is open.

So, John, your comments about taking your foot off the accelerator from a loan growth point of view -- in the past, you all have guided to this $4 billion to $5 billion number this year. Is that -- are you lowering that guidance at all?

It will be less than we were originally thought earlier in the year. We are purposely getting fussier about loans, we’re seeing - look we’re watching everything, we're watching the political situation, we’re watching the Fed, we’re trying to gauge when and if Fed will raise interest rates, we’re watching the behavior of our competitors and we’re just not willing Brady to meet some of the terms and conditions that some banks are willing to lend money out at today. So we will cut back from $4 billion to $5 billion, but remember that was a 30% increase in loan growth for the year give or take 29% something like that, we’re not going to 30%, we're going to do less than 30%, but you heard what both Leslie and Raj said, we don't anticipate backing off so much that they will have an impact on our EPS. [indiscernible] at these levels, those aren't very profitable anymore and so we’re being very careful. And to be frank with you maybe I'm getting old and conservative but you have to be a fool not to listen to what the regulators are saying particularly when they’re saying it as long as they are as loud as they are. One could argue that that they’re wrong, regulators believe that we’re deep into a credit cycle and that there is in fact a bubble forming, particularly like they’re talking about commercial real estate. I hope they’re wrong, I think they’re wrong by the way, but we don't know, I mean none of us are clairvoyant and we don't know what's going to happen in the future. So it's a good time to be cautious, we don't need to be overly aggressive between here and Christmas, and so we’re going to be cautious.

Okay, that makes sense. Then from a CRE to capital point of view, I know you all were kind of approaching the 300% level, what is that ratio updated for 2Q?

In 2Q, it's still [indiscernible]. But remember as we reminded you last time, we have our business plan in front of the regulators that provides for us to go over 300%, we have not, it's impossible to tell whether we will depending on what we do in the second half of the year. I mean if we do go over, it’s going to be basis points it’s now, we're not going from 300% to 600% or something, so it's not something we’re particularly focused on at the moment.

All right and then last question from me, John, you mentioned how the operating environment keeps getting tougher and tougher, we know you thought about selling the company before, how do you think about selling BankUnited versus remaining independent?

Bring me a $50 offer Brady, and we’ll talk about it. Look that issue before when investment bankers got out in front of us when we were still owned by private equity but it is old news and it was not us trying to go out and sell the company. Our view towards selling this company or using it to buy another company or merging it with something of similar size is the same as every thinking CEO who is running a bank this size is, we look for opportunities to improve shareholder value and we have said before that can come in any form. We are going to hang a sign on the place, something by the way have, some banks are quite aggressively up for sale these days. We think that we occupy some of the most valuable real estate in the United States and our growth prospects of the future better than most, so it's not our first choice but we are open to any and every way that we can improve shareholder return.

Our next question comes from Ebrahim Poonawala with Bank of America Merrill Lynch. Your line is open.

So I guess switching gears to expenses, I was wondering if John or Raj, I mean, I think if you can talk about in terms of sort of the opportunity in terms of having operating leverage and what given sort of your outlook on growth and probably rate staying lower for longer, where can like realistically the efficiency ratio head over the next three to four quarters?

So, I think the efficiency ratio obviously to your point is a product of revenue as much it is a product of expenses so it's going to be influenced by what happened with rates, I think we will see if we look at expenses as a percentage of assets, I think we’ll see that coming down to maybe a better barometer of what's really happening on the expense line. But as I said we're still looking at high-single digit operating expense increase for this year as compared to last year.

As far as revenue is concerned, we are not backing off saying we’re not going to grow, we are a growth company, we will still grow, I think I will repeat what John said, the 30% level growth while that may not be what happened since second half but it will still be a very healthy growth number. We are still talking about growing the balance sheet, it’s just that we’re trying to be more selective because at the end of the day, while loan growth has been a proxy for value creation, I think a better metric is eventually earnings growth and we’re getting more and more focus on everything that drives earnings, long-term earnings growth, EPS growth and whether it's deposits, whether it's expenses, whether its loan growth, securities portfolio and securities portfolio has grown what Leslie, about 1 billion or a little less than 1 billion this quarter - this year.

Yes.

That also generates revenue growth...

And a lot of liquidity as well.

And a lot of liquidity too. And it's not like we are extending the portfolio, we are simply making sure and - so we're looking at multiple levers of growth fundamentally...

[indiscernible].

This quarter we actually shorten duration and increased yield somewhat on...

In the last few weeks you heard a lot - the last few days you heard a lot of people talk about expense control, if you're running a bank in markets where there is no growth, no growth opportunity in the future and margins aren't going to improve and regulatory costs are going to continue then you can talk about aggressively controlling expenses. We are not there, this is a growing company, while it may grow slower the next couple of quarters then you're used to seeing, we are not giving up on growth certainly in this company. And some of the comments that CEOs made this quarter, Richard Davis for one, who described that he is hanging on by his fingernails waiting for things to change. Aren't we all? I mean we are waiting for rates to improve; we are waiting for better margins, so we're waiting for a more robust economy, we are waiting for lots of things that have not yet materialized, but they could be game changers if they come particularly early on in the cycle.

Understood. And Leslie if I heard you correctly, you did say you still expect you guys will meet the Street estimate which is about $2.14 ahead of the quarter?

What I said, I mean, we've never put out point specific EPS guidance and I'm not going to start now but I don't think that estimate is unreasonable.

We don’t worry about - we internally what we’re saying is that even running down loan growth for the second half to a lower level, if earnings are coming about where we thought they were going to coming in.

Well, if I can sort of tag in one more just in terms of M&A, as a buyer, not a seller this time, but Raj, you said - I mean, you look to be selective; you have been very selective so far. What would make sense for you? Is it more in terms of an asset portfolio acquisition, a non-bank financial or would a depository deal actually make sense?

It's hard to see a depository making sense for us because almost anything we look at on the depository site would bring us very close if not over 50 billion. And we are in no rush to get to being [indiscernible]. But what has made sense in the past and will probably make sense in the future are these ad hoc deals add-ons to our business lines where we buy something small which has the characteristics of a business that we like if we can grow safely and soundly and we continue to look at that space. I don't see us buying a big portfolio of loans coming out of a bigger financial institution which may be shedding them instead I look to small platform, small businesses, small teams of people who are highly motivated and good at what they do, and can come on with $200 million, $300 million and one day become four, five, ten times the size of that. That's the typical M&A model we've used and used quite successfully over the years.

Our next question comes from Stephen Scouten with Sandler O'Neill. Your line is open.

Question for you all on the securities yield, I know you just mentioned you took down a duration but still saw an increase in the yields, is there anything new that you guys are doing there, any changes in strategies that allowed for that dynamic to occur?

No, nothing new.

It's just opportunities we were able to find, we’re very focused on liquidity in that portfolio, we did add some to our liquidity portfolio, just able to optimize the mix a little bit this quarter.

It's been a very [indiscernible] in the fixed income market as you know, first quarter was China, second quarter was Brexit and who knows what will happen in the future but volatility in the fixed income market creates opportunities and we monitor them very closely, but there is no new asset class, no new securities, everything that we purchased has been stuff that we've always been like.

Yes. No change in the strategy.

Okay. And then, as it pertains to the growth rate for the year, obviously I know you said it's going to be potentially lower than the 4.5 billion to 5 billion or what have you and you’re tracking year-to-date maybe at about 3.4 billion in growth, is that a pretty good proxy kind of what the year-to-date growth has been or I mean, could it be even slower than what you've seen on a year-to-date basis?

It's too early to say. I mean, I don't expect it's going to be slower than that, but it is too early to put a number on this thing. As I said, it's completely within our control. We’re also looking at deposit growth. We expect robust deposit growth for the balance of the year and we are watching both sides of the balance sheet here as we grow.

Okay. And then just lastly, as it pertains to your relationship with regulators that you spoke to and just kind of their area of focus, anything in particular that they, in your discussions with them, feel more concerned about and specifically, I've heard from some banks that maybe there is a 17-ish percent threshold on multifamily that they are looking to and obviously you guys are above that. So any specific areas of concern or in particular any comments on multifamily exposure?

The only thing that we hear from the regulators publicly and privately is this target range, the 300% thing that many banks are operating significantly higher than and we’re still like, Leslie [indiscernible]. No, there is nothing else magic here, no other conversation about anything else.

But they've said to us, David and it's very consistent with what they’ve said before.

Yeah. It’s right. Our private conversations mirror almost exactly what the control is saying publicly.

Perfect. Thanks so much guys. I appreciate it.

Our next question comes from Dave Rochester with Deutsche Bank. Your line is open.

Hey, good morning, guys. So just to try to understand where you think loan growth can go. I know you said it's too soon to put a real range on it, but if you could just maybe give us some color on what the loan pipeline looks heading into this quarter, into 3Q, versus how it looks heading into 2Q, that might be helpful?

Yeah. Look, I’ll repeat and I know nobody is going to be satisfied with these answers, because a lot of people equate loan growth with probability growth, which is not necessarily the case. We have the potential for a very robust pipeline everywhere. We are going to be more selective this quarter and next quarter at least, and at least for the rest of 2016 as we watch what happens here. So we’re watching our competitors, we’re -- for people who are loan growth junkies and don't like the fact that our loan growth slows down, EBITDA profitability doesn't, I would offer this. Our job here is to preserve and create value over the very long term, not one quarter to come. And so we are in volatile economic times, where regulators are sounding the alarm to the entire industry and we don't want to ignore them and so I think that people who ignore what the regulators are saying publicly here, do it at their own terms.

Okay. So it sounds like the loan growth can be whatever you want, you are going to be more selective?

That's another way to say it. That's right. It can be whatever it wants.

And now, I guess, given the increased regulatory scrutiny you talked about, we've heard and we are hearing from you today and we’ve heard from other banks that they’ve seen some banks already pulled to the sideline. They've seen underwriting standards tighten. They’ve seen shortening of IO periods, LTV is down a little bit, exit tests on loans getting tighter and so it seems like the market is becoming more rational, if that's what we're hearing because the scrutiny has been in the market for the last, call it, 6 to 9 months. Wouldn’t that make it easier for you guys to find opportunities that are more powerful for you from an underwriting standpoint?

That is precisely what we’re seeing. We think that over the next six months or so, we’re going to see other banks react to this, some who make a pullback even more and we think that there might be better opportunity to make loans six months from now than there is today that is, i.e., higher rates, better terms and conditions and loan qualities that are more consistent with what we've seen in the past. So what we’re saying is we’re going to step back from the frontline here and I think that we’ll do better as this issue unfolds.

Just to be clear, the regulators haven't indicated to you that you need to slow growth in those areas, is that right?

No, we’re still under 300%.

Got you. And I know you were doing a lot of prep work this quarter, just to make sure you could cross through that 300%, is all the expense associated with that, which sounded like it was pretty minimal in the run rate at this point and are you effectively right at across through that if you need to or you want to?

We believe we've done all the work necessary to cross. We haven't -- and as I said, the business plan that is in front of the regulators earlier in the year provided that we would cross 300, but let me say, I'm not sure we will.

Okay. And then are you comfortable with the EPS, the consensus EPS for the year because you're going to make up for the slower loan growth and stronger securities growth, is that how you’re going to make up for it?

It's not that we’re going to build a loan bucket dollar for dollar. That's not how we’re thinking about it. As John said earlier, given the skinny margins on these loans and provisioning you have to do and what not, little bit slower loan growth doesn't have a material impact on our earnings expectations for the rest of this year. So again, I'm not going to put a point estimate out there in terms of forward guidance about EPS, but I don't think the estimate that's out there right now is unreasonable.

And with the slower growth that you’re talking about on the loan side, does that mean that your capital need at the end of this year might actually be a little bit smaller?

It's a possibility. As I said earlier, we’re going to continue to evaluate that, probably on a daily basis frankly to be honest with you as time goes forward and given the trajectory of growth and what we see in the markets, we will go when the time is right, but that's certainly possible, yes.

Okay. Great, thanks guys.

Our next question comes from Jared Shaw with Wells Fargo. Your line is open.

Hi, good morning. This is actually Timur Braziler filling in for Jared. Most of my questions have been answered, but I think you had said during the call that there is actually a couple of geographies where you’re actually able to increase the yield you’re getting from lending categories. Can you maybe elaborate a little bit on that, which geographies in specific and is there opportunity to enter new geographies where you currently don't do business?

I don't think I said it. If I did, I mistook. No.

I thought as others are pulling back, there are other opportunities to enter market.

No. What we’re saying is in general, but in the future. We think that there will be better loan opportunities as other banks tighten up their quality standards.

Okay. And then as we look at the multi-family category in the first six months of the year, is that directly related to this new commentary on parrying back because of the competitive pressures?

You mean, is it reflective in the second quarter, no, not really. I mean, we had very good multi-family loan growth in the second quarter. I mean, we started to think about this earlier in the year and we’ve said to you last quarter at the end of last quarter that we could very well slow down loan growth if we determine that it doesn't enter profitability or that we have to drop our quality standards, so they’ll be comfortable making those loans and that’s, so what we’re saying is we haven't, it's not in the numbers yet, but you should expect to see that in second half.

Okay, great. And then one last one, maybe just talk a little bit about the lending environment in Southern Florida and how that's changed over the past few months?

Actually, nothing must has changed in the lending environment. I mean, if you’re asking about asset quality, we are very pleased with asset quality in Southern Florida, there has been some publicity about an oversupply of high-end condos on the beach in Miami. We’re not in that business, although it certainly impacts the overall economy down there, but the overall economy in South Florida is booming and there are now signs of weaknesses other than that one that anybody is sorting that down there and we’re seeing more loan demand and more robust deposit growth than we've seen in a while down there.

Our next question comes from Ken Zerbe with Morgan Stanley. Your line is open.

Great, thank you. First question, just in terms of the margin, I get that your guidance is now at the lower end, so call it, 3.6% roughly for the full year, but just given it’s been so strong for the first half of the year, presumably due to all the FDIC noise, how does it fall so much in second half, like what, is it just -- is there something?

Yes. It’s two things, Ken and hopefully I'm wrong about that, but -- and it will come in better, but that's what it looks like right now. It is continued [Technical Difficulty] at the FDIC asset obviously and also just we've seen a lot of flattening of the curve and we’ve built that into our projections.

And that applies to your existing portfolio or I mean the core portfolio?

Currently, that’s more of an effect on what we’re putting on the balance sheet, and it does on what’s already there other than if longer term rate, if rates don’t go up, the existing stuff won’t re-price up. But that obviously has more of an impact on the new assets we’re putting on the portfolio than it does on the existing portfolio. But it’s a combination of the flattening curve and less probability, but increase in rates and the run-off of the FDIC asset. It's all of those things working together.

Got it, Okay. And then tax rate, is it -- obviously, it's been high for two quarters. Do you expect it to remain at the current level? Or trail lower?

[Technical Difficulty] I think it will stay around that range for the foreseeable future.

Our next question comes from David Eads with UBS. Your line is open.

Good morning. Just to confirm on that last point on the NIM, the NIM at the acquired portfolio is running at about 2.5% here recently. Is that what you -- do you expect to see more pressure from there? Or do you think the kind of puts and takes kind of leave you at about the same spot there?

I mean, we don't put out estimates as what the NIM is by portfolio. So that's your estimate, that's fine, but again we had guided last quarter to a range of 3.6% to 3.8%. Now, I think, given where the yield curve is, we’re probably going to be more towards the lower end of that range. I still think we’ll be within that range that we guided to, but more towards the lower end and it’s a function of -- the change in my guidance from last quarter is a function of the yield curve.

All right. And just to confirm some of the color you guys have given about the competitive environment, is the view that there's a difference that maybe Florida might be more -- getting more on the aggressive side of things than New York on the multifamily?

Absolutely not, no. If anything, maybe the opposite.

Okay. And then maybe -- I hate to kind of beat the horse about the consensus being reasonable, but I would think the slower loan growth is going to have a greater impact on the 2017 outlook, and there, I think consensus is looking for kind of mid-to-upper-single -- or sorry, mid-to-upper-teens earnings growth at this point. Is that where there might be a little bit of a trailing off of the growth rate as a result of this slowdown in loan growth?

Too early to say. As I said earlier, we’re watching deposit growth as well. If deposit growth remains robust, what I said about the next two quarters doesn't necessarily apply to the entire year next year. So we don’t know what's going to happen with rates. We don’t know what's going to happen with all that kind of excitement between now and then. So it's too early to tell.

Our next question comes from Joe Fenech with Hovde Group. Your line is open.

Good morning guys. I know you said M&A was more nice-to-have, not a need-to-have, Raj, but does that change at all in light of the comments on the loan growth? Does M&A take on more prominence in the strategic planning if your concerns about loan growth extend into next year?

No, it does not. If we were a company that was not growing or shrinking or stagnating, then yes, but we’re so talking about being a very fast growing bank compared to our peers. We're talking about struggling back loan growth just a tad, given the conditions that we are seeing in the market and the sentiment we’re hearing publicly from regulators about the state of CRE. That's all this is, it does not really change the fundamental strategy of the company. We will still grow and we will probably still grow faster than most banks out there and also create operating leverage and we’ll be more focused on the bottom line.

Okay. And just to put a final point on it -- NIM towards the bottom end of the range, loan growth below the current consensus forecast -- you know, you say you're not worried about estimates for the year. I know you touched on the investment book and some possibilities there, but just struggling to see how you get there. Is there something else we're not thinking about that gets better to make up for the shortfall in the areas you mentioned?

I mean I think that’s it. We’re still talking very healthy earning asset growth for the year, we’re still talking positive operating leverage and I think it will get us there.

Okay. And then last one for me. Just, John, given your comments on loan growth, I guess sitting in our seat, would you be concerned about others that operate in your markets that stick to their loan growth projections amidst these comments from the regulators? In other words, do you think we're going to see this type of commentary without exception across the spectrum of banks that are either approaching or over the 300% threshold?

Yeah. I don't want to fall into that trap, but we are all reading the same thing and we are all regulated by the same regulators. I mean, some are OCC banks, some are Fed banks and I think I said you last time that we saw that the OCC was generally holding their banks to a higher standard than the fed banks and the FDIC banks. I believe that has now changed and I think that the fed banks are being held to a standard that is at least similar to, if not the same as the OCC bank. So I don’t know what they are all going to do, but I think it's a fool’s game to ignore what regulators are saying at a time like this, and as I said before, you do it at your own risk.

Our next question comes from Brian Horey with Aurelian. Your line is open.

Thanks for taking my question. Leslie, I think last quarter, you said that you had a 10% reserve on the TDRs in the taxi portfolio. Has that changed at all this quarter?

I don't think the number on TDR specifically has changed materially now. The total reserve dipped a little bit because we did have some additional TDRs and a couple of loans that migrate on the risk rating spectrum, but I don't think the reserve on the TDR has changed materially as a percentage.

Okay. And are any of the -- is any part of the taxi book in the doubtful category at this point?

No.

Okay, thanks very much.

Remember that we don't have to struggle, we have almost exclusively New York loans and they have proven to perform much differently.

Our next question comes from Lana Chan with BMO Capital Markets. Your line is open.

Good morning. Just a follow-up on the margin in terms of the components. The -- what was the new loan pricing -- or the existing loan pricing on multifamily in the New York market in the second quarter?

So again, it has changed Lana. We have not seen any real variability in pricing recently at all. So that’s still probably 3.75 market on average.

What we are saying is we think that we will get better pricing there in the future, but not now.

Okay. And on the deposit side, it seems like your cost of deposits have moved up a bit over the last six months year-over-year. Are you expecting further creep-up of that, given your comments about better deposit growth in the back half of the year?

In terms of where the deposits come from, Lana. Generally speaking, the consumer deposits in Florida are more expensive than in New York. If the new private banking teams in New York do what we expect they’re going to do in the next 6 quarters, then there is a possibility that the project costs will come down, but we can't prove that until they actually deliver. All indications are that they are going to have a material impact on deposit pricing on the positive side, but that remains to be seen.

Okay. And just one more question on the taxi. Was there any change in terms of your methodology on cash flow modeling on the taxi portfolio this quarter for the DFAST stress test?

No change and actually we expect new data to be released by the TLC for the first six months of 2016, probably before the end of next quarter, we will take a fresh look, but nothing has changed about our methodology.

Okay. And sorry just one last question. On the provision going forward, any guidance on that in terms of relative to the second quarter?

I don't think you will see any material change in ALLL as a percentage of loans, provisioning, we expect to relate primarily to the pace of growth. So we’ll provide for new growth.

Okay, thank you. Okay.

Our next question comes from Gerard Cassidy with RBC. Your line is open.

Thank you. Hello. Sorry about that. In regards to your comments on the underwriting standards in the markets in New York and Florida, et cetera, how is it, at the national level, your businesses that you are growing at that -- in those areas, how are the competitive forces with your -- in those businesses?

Yes. I would say that things are better on the national front. From time to time, we also will see some irrational behavior from a competitor or two, but it's usually short lived and it gets back to rational behavior very quickly. So in the taxi business for example, we did see some not from a credit point of view, but from a pricing point of view, some bizarre behavior in, I think it was the month of May. So for a month, we were losing every deals because we were losing it by agent taxis. We were losing every deal and there was irrationality on the pricing front for a month and a half, and that went away and we’re back and things are just fine now. So from time to time, we will see that. I would call it credit irrationality or a pricing irrationality, but it’s less so than actual space than it is in New York and Florida.

And regarding your national businesses, could you rank them just in order of where you see the best opportunity for growth? Is it the mortgage warehouse business versus the municipal business, et cetera?

They are in different phases of their evolution. The municipal finance, business, which is at 1.2 billion today is now almost 6 years old. So it's in a different point of where it is coming from, right. Mortgage warehouse, just about two years old and it's really just started growing this year. So on a percentage basis, you’ll probably see, you are seeing much higher growth there, but because it’s just brand new. Pinnacle, which is the oldest is growing dollar wise probably the most, but on a percentage basis, the least. So we don't try. It really is a hard one to call out Gerard, because it does vary quite a bit from quarter to quarter.

And then on the mortgage warehouse business, Raj, as you take more market share as you become a bigger player, how much of an influence is the pickup in refi activity, assuming it continues? Or -- I think mortgage originations came out and they're up 16% year-over-year in the applications. Is that very important as part of that business or somewhat important?

Yes. It is important, it certainly is a tailwind that helps us. There are other factors also that we have to be very careful about. There is a lot of regulation that is changing in the mortgage phase, especially as it has to do with disclosures and so there are some headwinds. But there is also the benefit of a refi boom that we are going through, which is a nice tailwind. So overall, the business is healthy, mortgage warehouse is a good space, we like the business. We’ve been deliberately very slow in launching it and growing it in the first couple of years, but we feel comfortable where we are now willing to grow it again, not expecting anything crazy out of it, but a nice steady growth from here on.

Our final question comes from Mr. Steven Alexopoulos with JPMorgan. Your line is open.

Hey, everybody. Not to beat a dead horse, because I know everybody has been asking you, but the more you answer the questions on what type of loan growth, the more questions I'm getting on it. So what I'm trying to understand is, the update of you on loan growth. And as long as I've covered the industry, it's basically always been hyper-competitive. And, John, as long as I've known you, you've always been skeptical of what other banks were doing. What's changing here to drive the reduced appetite for loan growth?

Well, Steve, two things, principally. The relative profitability of loans at this level when competitors are being irrational about terms and conditions and pricing, and that's -- I'm not sure what that’s reflective of other than the fact that the market is paying for loan growth at all banks, so some banks are very aggressive about lending and they are willing to put on loan growth at all costs, we’re not. And secondarily over our shoulder is this idea that the regulators are concerned about the rapid buildup of loan growth in the industry in general and I think we’d be fools to ignore the signal coming from them. So, look, if we were to -- whatever we grow between now and Christmas, we will be one of the standout growth stories of all midcap banks in the United States. So don't take from this conversation the idea that we’re going to stop growing, take from this conversation that we're trying to be circumspect here, we're trying to be intelligent, we are looking at all the forces that come to bear on us in our balance sheet and we're stepping back and saying, you’re paying us to create value long-term. And sometimes that means modifying the behavior and so when you're not getting paid to take the risk, you were a fool to take a risk, because there is a, in our family there is an expression that’s usually said in German and I can’t repeat it because it’s in German, it says that it’s nice to dance, but sometimes, it’s nice to sit down. We’re not going to sit down, but we’re not going to dance every dance between now and January 1 and we expect -- I expect, I may be wrong, but I expect that the environment and the relative profitability of making loans is going to get better over the next six months and for loans that we might make at a certain rate today, we can get a higher rate if we wait a while. And so we think we’d be fools not to do that and we don't need to do that in order to keep up our growth trajectory of earnings and any of the other metrics that we measure ourselves against.

Okay. And regarding the New York City commercial real estate, following up on your point that the FDIC banks might be held to the same standard as the OCC banks, I would think that would be a positive for you guys. Is that what you are referring to? Okay.

Yes, absolutely. Because the idea that the other banks have been held to a lower standard has only very recently changed. And so we think that there will be impact from that that we will feel over the next few months.

Okay. And then finally, regarding the 300% concentration threshold, even though growth might be slower, do you still think it's likely that you do cross that this year?

It's going to be right on the cost. They would be not by a lot.

Okay. I appreciate the follow-ups. Thanks guys.

And that concludes the Q&A session. I will now turn the call back over to John Kanas for closing remarks.

Look, everybody in this call, including me, wishes that we could report on different market conditions than exist today. Interest rates are near zero. The economy is in the 7th or 8th year of expansion. There is political uncertainty everywhere, both in this country and outside of this country and so risks exist that we have to take into consideration when we’re managing this company and we are managing this company for the long-term for safety and soundness and profitability. And so it is incumbent upon it, look, somebody is going to run out of the room and say I don't know, it’s not going to grow as fast, I don’t want to own stock anymore. Okay. Fine. You will be back by the way, because we expect that by being, by holding to a higher standard eventually would be paid a bigger dividend. And so don't write us off in terms of the growth company, but we are not going to lead the way into uncharted waters. Anybody else have anything to say? Okay. Thanks everybody. Appreciated.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.