BankUnited, Inc. (BKU) Q3 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the BankUnited Inc. 2016 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to 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 assumptions 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 developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the Company's annual report on Form 10-K for the year ended December 31, 2015 available at the SEC’s website www.sec.gov. John?

Good morning everybody. Happy to bring you the results of our third quarter. This was a solid quarter from growth perspective. New loans and leases grew by a little over $900 million, with Florida contributing about $380 million of that, New York $125 million, and the national platform is winning the race this quarter with about $406 million worth of quarterly growth. It's been noted too that deposits grew by a little over $600 million for the quarter. The elephant in the room, obviously, is the fact that earnings didn't come in where we expected them to and we'll talk in more detail about that, but suffice it to say that there was a confluence of non-operating, one-time events, none of which were related to each other, Leslie will give you more detail about them later, but there was a litigation accrual for a litigation that goes all the way back to Herald National Bank. There's a payroll tax that penalty that we got hit with as a result of an audit, but obviously, the big indicator here is the fact that we took a much more aggressive reserve on our taxi medallion portfolio. The asset quality indicators other than taxi remain very favorable; we're not seeing any signs of any systemic deterioration or asset quality issues other than taxi, which will talk more about later. While the non-performing, non-covered loan ratio did increased to 61 basis points, it's fair to add that 30 of the 61 is taxi, some of which are TDRs and some which are actually performing, so I think the actual ratio of non-taxi non-performance went down a little bit. Net interest income continues to grow quarter-over-quarter, increased by 18% for the nine months ended September 30 as compared to the same period last year. We saw an increase, actually saw an increase, and I can’t remember when we saw this last, on the average yield on new loans for both the three-month period and the nine-month period ending at the end of September, so we're encouraged by that. We want to take a few minutes to talk about the bank's overall strategies going forward and the – obviously, the upcoming management transition. First let me say that the fundamental strategy of BankUnited of building a diversified regional commercial bank haven't changed. I think that we inadvertently hit a trip wire at last quarter when I warned that we were going to slow down our loan growth rate, but you should see, as a result of this quarter, that obviously, for some of you who thought we are going back down to zero, that that's not happening. In short, the Q3 growth rate should be a fair indicator of our loan growth expectations for the rest of this year, although likely a little bit less into the fourth quarter. We will put more specific guidance on that when we do the fourth quarter earnings call in January. BankUnited continues to be a growth company. Having said that, we've grown into our capital and our funding base, we've passed the inflection point we always have talked about, revenue from new assets has outpaced the runoff revenue stream from the FDIC assets. Given that, you can expect our loan growth to continue, but to be more selective and at a more moderate rate than we experienced in prior years. We've been saying for a while, and you'll hear us talk more and more about in terms of deposit growth not just the left side of the balance sheet. Our loan-to-deposit ratio now sits at about 100% and we've said that while we would be comfortable going as high as 110%, we would prefer to keep that ratio at or just slightly above where it is. As we move into 2017, we'd like to see deposit growth equal or exceed the growth in loans, and to be frank with you, taking a look at what our new team, our new department has done and some of our private bankers in both New York and Florida have done, it looks like that we're well on our way to accomplishing that going into 2017. Let me talk briefly about the management transition and I've spoken to many of you personally about this. As you know, we announced earlier in the year that I'd be retiring CEO. It's interesting that I think this is the 161st quarterly report that I have delivered to shareholders, starting in 1976. And to put in simple terms, that's enough. I got a big birthday coming up in a couple of weeks and the decision to transition management has been something we've talk about for years in this Company and we're delighted – I'm particularly delighted, since I remain heavily invested in this Company, both financially and emotionally and actually as Chairman. I'm particularly delighted that Raj has been with me for all of this time and Raj has been an important part of the architecture of this Company going back to the very beginning, as he was frankly with me at North Fork. So most companies when they face this juncture have to start looking all around the country to find somebody we've never met to bring in a CEO. We are delighted that we have that between Raj and Tom Cornish, who joined us a few years ago and is an expert in Florida banking and banking in general. I'm very comfortable that there is plenty of management horsepower in this Company and I'll look for to seeing how the new guys do and, having said that, let's turn it over to one of the new guys. Raj?

Thank you, John. I’m not sure I'm the new guy.

Young guy.

Well, I am younger, yes.

That’s not hard, to be younger than me, right?

No, after 161 quarters, I think we're saying you're old, but that's okay. That's what I heard.

That’s right.

I've been with the Company from the day it was founded. My fingerprints are all over the strategy of the Company. I'm not coming from outside, as John said. So the inevitable question that I've gotten from shareholders who I've seen over the last two or three months, and will probably get at this call also is what changes in the future? And the answer is not much. The strategy is to build a diversified commercial bank, not a universal bank, but a diversified commercial bank. We have been at it for the last seven years. This is just the next chapter in the evolution of the bank. Having said that, the strategy does get tweaked from time to time whether there is management transition or no transition, there's always things we have to tweak. We are standing at that juncture where we have been growing loans very nicely over the last several years. We have paid less attention to the right side of the balance sheet and it's time to pay more attention to it This quarter is a perfect example of that $900 million of loan growth and $600 million of deposit growth. You can do the math. If you keep doing that over and over again, you will have an unsustainable situation where you loan-to-deposit ratio will drift up to a level that is probably not safe and sound. So starting this year, we have started focusing heavily on deposit growth. You'll start to see the results of that in the coming quarters. And we are very optimistic about building the funding side just as well as we've done the loan side. Keep talking about deposits. We did grow a strong $604 million, but we're not satisfied with it. We expect to grow a lot more, eventually grow deposits more than loans in 2017. The national deposit business, which was the most recent thing that we launched this year about five months ago is coming along nicely. We have said to you in the past that success in the business will be measured not in hundreds of millions but in billions of dollars over a portion of two or three years. The team is off to a strong start. They have a little less than $400 million in deposits and with the cost of funds which is just a tad below our cost of funds for the whole bank. The other national businesses are doing well, quite well. Residential is now up to almost $3 billion. Pinnacle which is municipal leasing is at $1.3 billion. The franchise business is up to $460 million and the operating lease business, both the loans and the leases combined, the transportation finance business is at $980 million or so. The warehouse business, which is a more recent add, at the end of last year was only at $82 million in outstandings. It is now at $335 million in outstandings and we expect that to continue to grow as we go into next year. Another business that we acquired last year, the SBA business, which has now been under our umbrella for a little more than a year, about a year and four months, is coming along very nicely. We're expecting about 20% year-over-year growth and we're very happy with the platform we've acquired and are aggressively hiring to build that business. With that, I'm not going to give you the numbers. I'll have Leslie walk through the details on the P&L.

Thanks, Raj. I know everybody probably wants a little more color around what's going on in the loan loss provision and so I'll take a few minutes and try to provide you a little bit more detail around that. For the nine months ended September 30, the provision related to new loans was about $44 million compared to about $34 million for the nine months ended September 30, 2015. So that's an increase of about $10 million year-to-date. Substantially all of that increase, $9.7 million, is related to the taxi portfolio. There's a lot of moving parts in the reserve in the provision, but all of those other components, qualitative and quantitative loss factors, specific reserves, relative growth, really essentially offset each other for that nine-month period. Looking specifically at the third quarter in isolation, you saw a total provision of $24 million also up about $10 million from the immediately preceding quarter, ended June 30. About $4.3 million of that increase relates specifically to an increase in qualitative reserve factors. You saw the allowance this quarter go up from about 76 basis points on total loans to 83 basis points. That's driven mostly by that qualitative reserve increase and it's consistent with – we think it makes sense to see that reserve build as we move through the credit cycle consistent with what we communicated in the past with respect to our expectations around that and we just, we feel good about that. The remainder of the increase is primarily related, for the quarter to higher provisioning for loans specifically identified as impaired. The largest component of that is one taxi medallion relationship. We have a large taxi medallion relationship comprised of 17 individual loans, total outstanding balance of about $21 million. We took a $6 million reserve on that one loan this quarter. We did that because we've been unable to negotiate a modification and extension agreement with that particular borrower, so we charged all of those loans down to collateral value this quarter or took a provision, a reserve, down to collateral value this quarter and that added up to about $6 million. So that's the biggest chunk of that specific reserve activity for the quarter. We did put reserves on three other loans this quarter, just to give you as much color as I can around what's going on. Disparate, unrelated, one in New York, one in Florida, one in the national franchises. They were each – around 2.5 million a piece, so nothing – I bring that up only to point out that that's nothing unusual. That's the kind of thing you expect to go on in a loan portfolio as it seasons and is nothing out of the ordinary. So other than taxi, we're not seeing any signs of systemic asset quality issues in the portfolio. The net charge-off rate remains very low at 10 basis points on annualized basis. Charge-offs this quarter, $2.6 million of the around $6 million in charge-offs we took this quarter were taxi. And the rest, there was nothing else in there, no other individual things n there that were of significance. And to give you a little more detail on the taxi portfolio, we do this every quarter, so I'll give you an update. The total exposure now stands at $192 million, down from $200 million at the last quarter end, right at around 1% of total loans. The reduction was the $2.6 million in charge-offs that I referenced and then an excess of $5 million in pay downs as John referenced earlier in the call. To-date, $58 million in taxi loans have been modified in TDRs and $29 million of that was done this quarter. That will probably continue for at least several more quarters as the rest of these loans come up on their three-year maturity date. As you know, our evaluation of these loans and collateral value and collateral values is based on an analysis that we do of reams data that are made public every six months or so by the taxi and limousine commission in New York. That was updated this quarter and we did bring our collateral valuations down a little bit further. Based on our updated analysis, we now have in New York which is 95% of our portfolio. We've now got corporate medallions valued at around $620,000. That compares to some recent sales in the market at $625,000. And our individual medallion is down to $570,000, which is right on what the average selling price has been over the last six month or so, which has been $572,000. So we're kind of seeing our cash flow analysis converge with what we are seeing in the way it trades in the market, which makes us feel good about where we are with those valuations. Delinquencies in the portfolio are actually still relatively low even though we got $54 million of this portfolio sitting in non-accrual because of various circumstances related to the borrowers. Delinquencies are actually down this quarter to around $13 million. However, I say that the $21 million relationship I referenced earlier is not yet delinquent but will be, so you'll probably see that number go up in the fourth quarter. The reserves allocated to medallion loans in the aggregate stood at 8% at December 30th so that's up a little bit from where we were at the prior quarter. A couple things going on there the big reserve we put on the one loan offset by some of the portfolio running off. So that gives you kind of an update on details around the taxi portfolio. I'll give you a little more information. John mentioned there were two kind of unusual items that impacted non-interest expense this quarter. We have a $2.1 million accrual that we booked this quarter related to a litigation matter that, as John said, relates back to the Herald National Bank pre-acquisition. That's all I can really say about that. And a settlement of a little over $1 million of some payroll tax penalties that came out of a three-year payroll tax audit that we just concluded. We continue to see steady growth in net interest income. As John said, we saw an increase in the yield on new loans compared to the prior year as well as an increase in the yield on investment securities compared to the prior year so those are both very encouraging signs to us. The cost of interest-bearing liabilities was 92 basis points for the quarter, down just slightly from 93 basis points for the immediately preceding quarter, up from 83 basis points for the comparable quarter of the prior year, but that's mainly due to the cost of the senior notes that we issued in the fourth quarter of last year. As expected, pressure on NIM continues due to the fact that new loans are comprising an increasing percentage of the total loan portfolio as compared to the loans acquired in the FSB acquisition. It’s coming down at a relatively consistent pace at this point over the last several quarters down to 369 this quarter from 375 last quarter. That will probably continue at a pretty consistent pace for the near-term, which still puts us in the 360 to 380 range for the full-year that we've guided to previously. Non-interest expense growth, excluding amortization of the indem asset is running right around 8% growth year-to-date, which is also consistent with the guidance that we've put out there for the year. As far as 2017, as you all know, we are right in the throes right now of our budgeting and business planning process, so not prepared to give 2017 guidance today, but as we always have in the past, we will provide some guidance to you around 2017 on our fourth quarter call. I want to touch real quickly on capital and we've previously stated that as the balance sheet grows eventually we’re going to find ourselves needing to augment capital and probably will do that in the form of some kind of debt. In terms of timing, we haven't taken later this quarter off the table, but sitting here right now, I think it's more likely that this is going to be a 2017 event as opposed to a fourth-quarter 2016 event. That's all I've got to say. John, do you have any parting comments or anything you want to say before we go to Q&A?

I think I could have delivered to Raj a better quarter on my way out of here, but sorry about that. But you've got no place to go but up from here. So I'd love to take questions.

[Operator Instructions] And our first question comes from Jared Shaw of Wells Fargo Securities. Your line is now open.

Hi, good morning.

Hi Jared.

Hi Jared.

Could you give a little update on what you're seeing on the competitive landscape especially in New York obviously, you both talked down growth a little bit at the end of last quarter and we saw that with the originations in New York are you seeing any changes there where you could see that – you can see your growth increase or are you still seeing pressure there and consider slower growth for the next two quarters?

Presumably, the OCC has been very vocal about wanted to tamp down commercial real estate lending in all banks and particularly in a lot of the New York banks, I don't know that we have enough data yet to support it but it feels to me like we're getting a little bit better pricing on those kind of loans as a result of the fact that some banks are actually being taken right out of the business. So competitively everybody’s being more cautious with commercial real estate lending. And I think that's leading to a little bit more leverage on the pricing side for us and probably everyone else, but look as I said before, we've only fools would disregard what the regulators are pounding the table about right now. So you can expect us to stay very much stay in the commercial real estate lending business but not to expanded dramatically and certainly to be mindful of whether regulators having to say about that. So I would say the news is that probably better pricing coming in this product and fortunately for us as you can see by the way that our loan growth – by the way our loan growth hits this quarter that we have plenty of room to diversify our loan growth one of the best examples I think that Raj mentioned was more was warehouse lending which we like as a business and are able to turn that up when we have to turn other dials down.

I'll add to John's comment about New York and say the same thing is happening in Florida.

Yes.

Commercial real estate – yes, there is less competition today than a year ago regardless of market.

I mean what were the origination yields this quarter especially in the New York market for the loans you did make?

I do have a hard time hearing you say that again.

What were the origination yields for the loans you did make this quarter in New York?

Low 3s in New York is low 3s.

Okay, thanks. And then shifting to the deposit side it's good to see the growth coming from the new team were there other deposit initiatives separate from that we are working out and anything we should expect apart from the consistent growth I guess going forward from the new team?

The new business will obviously contribute in a big way next year, the existing – the story of deposits for us this year has been – that Florida has actually been its budget and New York has not, in prior years we’ve had the opposite where Florida has always come in a little short they got look over the last couple of years and New York is always come in above budget. So things turned a little bit this year, what we're trying to do next year is make sure that New York comes back to its form of the first couple of years, and Florida maintain its momentum and the new team launch in a big away. So there's no any big initiatives other than the national business we’ve launched but we are more aggressively paying our people for deposits rather than loans that's one. And two, we're looking more aggressively with deposit generators in both markets especially in New York. But I would call there’s any big new initiatives stuff that we have always done.

Indications from our Florida banking – private banking teams and our New York private banking teams are quite positive going into 2017. So I would say we're generally starting to hit on all cylinders there, yes.

The pipelines are very healthy?

Yes. The pipelines are very healthy.

Thanks. And then just finally on the investment securities with the yield that you start pick up there was any change in the philosophy how you're looking at that, there is any duration are buying new asset classes and if you can just sort of walk through what we saw there.

Yes, now the asset classes are consistent with what we've held in the past duration is still low, under two, we still do use the bond portfolio as a liquidity and interest rate risk management tool in addition to giving some yield this quarter, actually the securities we bought at a higher yield and lower duration than the securities we sold that's been consistent over the last couple of quarters, most of the net growth in the portfolio this quarter was in CLOs and also in agencies Ginnie Maes and SBA floaters. So you'll see all that detail in the 10-Q.

Great. Thank you.

Yes.

Thank you. And our next question comes from Lana Chan of BMO Capital Markets. Your line is now open.

Hi. Good morning.

Good morning, Lana.

Hi, Lana.

I kind of missed your comments before. I wasn't sure if I heard it right. The third-quarter growth rate for loans, did you say that was a fair indicator for 4Q or for 2017?

It'll probably be a little lower.

What we said it was indicative of what you can see in the future but probably a little bit lower in the fourth quarter.

We did not get guidance for 2017, Lana. We will provide that on our next call as we always do.

Okay and then the outlook for the fourth quarter being a little bit lower, is that because of seasonality or something else?

It’s just how the pipeline is coming in and when we expect closings to happen nothing, you know…

And it’s consistent with what we signaled last quarter is that more emphasis on deposit growth and being fussy with loan growth being selective.

Okay. And this fair to say that, in terms of your CRE concentration, that the levels there, you're managing to not cross over the 300% threshold at this time?

Someday we will. We're not there yet. And if I just look at the pipeline for fourth quarter, I don't think we will be there at the end the fourth-quarter either. But if we keep growing like this probably in the first quarter we might be. But right now, it looks like based on the current pipeline that it's not going to happen this year.

Okay. And then just one last quick question. I also missed the reserves on the taxi portfolio.

8% right now.

Okay, great. Thank you.

Thank you. And our next question comes from Ken Zerbe of Morgan Stanley. Your line is now open.

Thank you. Good morning.

Good morning, Ken.

Good morning, Ken.

I guess, just on taxi, and I'm not trying to be dramatic or sensational with the question, but how do we get any confidence that taxi just doesn't remain an issue? And your provision is $20 million, $25 million, $30 million kind of every quarter going forward. I mean, you're not the only one that's had taxi problems this quarter so I think a lot of people are kind of trying to figure out what is the long-term outlook for taxi?

That's tough. I mean, on the bright side, we did have $5.2 million worth of normal amortization off the portfolio, which is encouraging, there is a market for these things which is encouraging. But when you have something hit like we did with this guy who's got $20 million worth of medallions and he doesn’t want to work with us, well that you got no choice but to take a reserve and go after the collateral and sell it later. So look, none of us are clairvoyant. I know other banks have this same issue. Medallions are still worth $500,000 or $600,000 apparently. People are making money by owning these things and driving cabs, but I don’t know that anybody can put a reasonable guess on this going forward.

Ken, I think one of things that we feel good about is the fact that the cash flow template we run in the valuations that's throwing off are really starting to converge with where we are seeing trades, but I think there is just going to be uncertainty around this over the course of the next four to six quarters at least before we really have any sense of where its – true sense or final sense of where it's headed. This is uncharted waters, it's new territory for everybody and, you're right there is going to be a certain amount of wait-to-see. The one thing I can tell you is that this is less than 1% of our loan book and it can sink the ship.

Yes.

Even if every dollar went to zero which isn’t going to happen it wouldn’t sink the ship but we don't know you're right there is uncertainty around that.

And this is, the performance is as we predicted over the last two or three quarters. We told you that this was going to happen, that this was going to have to work out loan-by-loan and borrower-by-borrower, some of which will be cooperative and restructure and are, some of which will pay off and they have and some of which are going to fight and when they fight well then we’ve got to fight back.

All right. And then I guess switching gears a little bit, I think you mentioned in terms of the higher reserves sort of ex-taxi, there was, I think it was higher qualitative factors. Did the qualitative factors relate to taxi or were the qualitative factors on CRE?

Yes. On CRE, I’m glad you asked that question because I did mean to provide a little more clarification around it. So the particular we have this framework of calculating the allowance that has a laundry list of qualitative factors that go into it it's not unexpected to see some of those go up as we move through the credit cycle as I said I feel good about that the one in particular in our framework that was tripped this quarter had to do with specifically the growth rate of U.S. GDP which is now been revised downward to sub-2%, and that tripped one of our factors that we look at it putting up qualitative reserves and drove kind of a 5 basis point increase across the portfolio.

Got it. Okay. So it didn't relate to actual CRE deterioration?

Correct.

All right.

Correct.

Perfect. Okay, thank you very much.

Thank you. And our next question comes from Stephen Scouten of Sandler O'Neill. Your line is now open.

Hey, thanks. Good morning.

Good morning, Stephen.

John, first of all, congratulations on a highly successful career. 161 quarters is a very long time. It's nice to be able to go out on your own terms with a fantastic track record. And, Raj, congrats on your new role. I know it will be a successful track record as well.

Thank you. There must be play book around somewhere that says 161 is enough.

I don't know. I think I've been at like 45 covering banks and it feels like a lot, so I can only imagine.

Well, you've got a long ways to go.

Yes, apparently, apparently. So just think about the growth portfolio moving forward, and John, you made an interesting comment about the national portfolio and maybe some of the mortgage warehouse business and how that can kind of fill the bucket as needed. I guess one, can you tell me what the amount of that 360 plus national, what amount of that came from the mortgage warehouse? And if you think that business could contribute more and more in the coming quarters.

The warehouse business at the end of 2015 was $82 million in outstanding, at the end of September, that had grown to $336 million.

$200 million-something at June.

So commitments are obviously higher, a little more than $0.5 billion and we will continue to see growth. Now, we're not going to do any unnatural acts of growth on, or for any business, this one or anything else. We have to grow safely and soundly so you should expect to see growth in this business and others, but there's Pinnacle, the residential business, Bridge all of these. But it all depends on the market that we're, the pricing that we are getting, the credit outlook. And this is a relatively new business that's why the growth rate looks very healthy because it starting from a very low base and it has a lot of room to grow so we're very optimistic. The pricing, the credit outlook is good and we will grow it, but we're not going to do something silly like promise you all we will just grow it by $1 billion next quarter. That would not be wise.

Okay, yes. That makes sense. And then do you start to do anything with your current lender base in terms of repurposing any of these lenders away from CRE more towards C&I? Or focused on hiring additional C&I lenders? What does that look like from a kind of focus for you guys on your legacy markets and what sort of loans you want to focus on?

You're describing our day-to-day lives. That’s what we do for a living: constantly reallocating resources, not just capital, but human resources as well, based on the realities of the market that we are in and the environment we are in. So whether it's between loan categories or between deposits versus loans, we're constantly readjusting and we're right now in the middle of planning session doing all of what you just described.

I've mentioned that we do this, however, cautiously. I meet with bank CEOs around the country and everybody is getting pressure to get out of CRE and is pushing their staff towards C&I lending and I have been around long enough to know that when everybody runs towards C&I lending at the same time, the result is not necessarily good. So we're being very careful about that. That's why some of the other categories that we are managing are more interesting than others, but remember that, for the most part, C&I lending is unsecured commercial lending and in an economic downturn, it can turn around and bite you as well, so we're being careful.

Yes, that's a very good point. And then one other question, just going back to the taxi medallion portfolio. I mean I think it sounds like maybe $4.5 million in incremental reserves. Or no, I'm sorry. Maybe $5.5 million in incremental reserves were allocated to the taxi portfolio and it looks like really that one large relationship drove that. But the increase in NPLs was maybe up $38 million quarter-over-quarter related to taxi.

Also mostly that one relationship, Stephen.

Okay. Some of the data in the queues, which was really helpful, showed, I think last quarter, about 41% of those loans were over 100% LTV, so I mean, is that going to be a problem where that number is going to increase from 41% potentially and we could see incremental quarters like this for the next couple where you have higher than expected reserves or do you feel pretty adequately reserved even given the overall trends in the values you spoke to earlier?

Yes, so that number did go up this quarter. It went up as, I think I mentioned earlier that we, that number is all based on this evaluation that we do of potential cash flows based on the TLC data that we download and analyze and it really comes out every six months, so that number did go up again this quarter I'm looking for it but it's over – it's right around 50% I can't find it but based on my memory is right around – okay, 52%. It’s right around 50%. So it did go up. That is what drove the decline in medallion valuations that I mentioned earlier on the call. That's what drove us to reduce the decline in medallion valuations. The thing that's really driving that is a reduction in the number of trips per day, the number of fairs per day that the cabs were picking up. That was the statistic or the data point that really drove that. Is that going to continue to get worse? You know, I don't know, Stephen. We sit down at the end of each quarter and we make the best estimate we can based on all of the information that we have. Could it get worse? Yes. Will it? I don't know. Could it get better? Yes, but we don’t know. We make the best estimate we can every quarter based on all of the data, literally hundreds of millions of data points, that's available to us and that's where we are today, but I can't promise you it won't get worse. I just don't know.

Yes, no that make sense. Thanks for all the color, guys. I appreciate it.

Thank you. And our next question comes from David Eads of UBS. Your line is now open.

Hi. Good morning.

Good morning, David.

Maybe on the outlook for deposit growth. I know that there's a big question mark given what could happen with the overall rate environment, but if we hold that aside, with the focus on deposit growth, should we expect a little bit of pressure on the average cost to deposit or do you think you can keep that relatively stable?

So, when I think about deposit strategy, there are short-term goals and there are long-term goals for us. The short-term and immediate goal is quantity and longer-term goals are quality and quality gets described in a couple of ways and I'll get to that in a minute. By quantity what I mean with the short-term is look at what we did this quarter. We had $900 million plus in loan growth and only a little over $600 million in deposit growth. That's a mismatch that we cannot afford to have for too long. We need to bring that into equilibrium and I would actually prefer that we have a few quarters of more growth on the right side of the balance sheet than on the left side of the balance sheet. So that's our short-term goal. Our longer term goal, which will translate into cost of funds, is to have a better mix of deposits, more DDA, more inexpensive interest-bearing accounts, and drive our cost of funds in the opposite direction. As you see, our cost of funds has been inching up about a basis point per quarter. We have to stabilize that and eventually turn it back. There's a lot of room to improve that. But, the focus, at least in the first, for the next two or three quarters, is going to be bring the velocity of deposit growth up. And then once we have the luxury of having excess deposits, we will then try and chase out some of the more expensive deposits and bring the cost of funds down. Eventually, very long-term, as in defined over three and four years, is the LCR value of deposits. We are today a sub $30 billion bank. Someday we will be $50 billion and then over $50 billion, and while that's years away, we have to start thinking about it and solving for that over the next couple of years and if we don't, we will have a problem four or five years down the road when we do get to $50 billion. So that's how I'm thinking about deposit strategy: quantity, quality, and eventually, LCR.

Great. That was very helpful. And then maybe if you could give some color on digging into the dynamics of the income from resolution of covered loans and that has ran negative this quarter. And just kind of if I could get a little color on exactly what driving the negative realizations there, just because it seems like those assets are, valuations have held up, or have improved pretty well there. So it was just a little bit surprising to see that and if you could just kind of help sort that out.

Sure. So you've got to separate in your mind that yield on covered loans from resolution income. The yield on covered loans has consistently gone up. However, as I've guided to you in the past, the net yield on the indem asset and the covered loans has really remained pretty consistent. The net combined yield this quarter was between $10 million and $11 million, same for last quarter; just under $10 million for the March 31 quarter; year-to-date, it's at $10.5 million; year-to-date last year, it was just under $10 million. So it's between that $9.5 million, $10.5 million range that I've guided to all along. That's the yield piece. The resolution income piece, resolution income occurs primarily when somebody walks in and pays off one of these loans in full. Because obviously all these loans are sitting on the balance sheet at a discount and if somebody walks in and pays one off, that generates a gain. But you got to remember that only 20% of that falls to the bottom line, so the net impact of all those transactions on the P&L is getting less and less material as we go forward and that will probably continue to happen because the portfolio is shrinking and there are just less and less transactions. I think we quantify for you in the press release and in the 10-Q what the net impact is, the main driver of that net impact being more negative this quarter than it has been some quarters in the past with the loan sale results. We had a loss on our covered loans sale this quarter. That's all just driven by market dynamics. What loans are in the pool to be sold and what the market's looking for and what they're willing to pay. But again, only 20% of that ends up dropping to the bottom line. I don't know if I answered your question or not, if there's something more specific I can tell you, but I think the impact overall of all that stuff is going to continue to decline because the size of the portfolio is just shrinking and there's less of it out there and we've always known that and it's a trend that's been going on for a long time.

Sure. I guess I was just surprised that it was a net negative this quarter.

It's because of the loan sale. We took a loss on the covered loan sale this quarter instead of a gain. That varies, again, quarter-to-quarter depending on A, which pools the loans come out of because some pools are at a deeper discount on the balance sheet than others, the characteristics of the loans, and what the market is looking for, who's looking to buy what kind of assets and what price. So that can be somewhat variable, but that was the real driver of that. I was the loss that we took on the covered loan sale.

All right. Well, thanks for taking the question.

Yes.

Thank you. And our next question comes from Ebrahim Poonawala of Bank of America. Your line is now open.

Good morning, guys.

Hi.

I just had a follow-up question of deposit growth. Raj, if I heard you correctly, you said the national deposit team was at $400 million at the end of the quarter.

I didn’t know, no. No, I misspoke. They are at a little less than $400 million today, not at the end of the quarter. They've had some good inflows this quarter in the last couple of weeks, so they are at about $370 million, $375 million, give or take, as of yesterday.

Right, yes.

Okay and do we know where they were at end of the quarter?

I think they were mid-$200 million or so.

Yes. $200 million something.

Yes, $200 million something. I don't have the exact number.

Understood. I think there's a growing sense that we should see deposit growth just $700 million and odd in the second quarter move sort of from left to right upwards. And I'm just wondering if this quarter's deposit growth net-net was a bit of a disappointment or am I not thinking about correctly that deposit growth should gradually trend towards the $1 billion mark per quarter?

That's where we're trying to take it. So would I've been happier at $700 million or $800 million? That's what we were shooting for. We did get there. So yes, I'm not very happy with the deposit growth, but I'm more optimistic about fourth quarter and first quarter.

That's helpful. And just switching back, and I'm sorry if I missed it, on CRE, where do we stand in terms of just satisfying the requirements in terms of the enhanced monitoring. I know you mentioned that you may cross the 300% threshold in 1Q, but we have all the ducks lined up where if you decide to move, the regulators would be happy with what you have? And I use happy in a very adjective sense.

The work that is being done over the last several months, I would say we are pretty far down the path, but it's very hard to say when will regulators be happy because they have to come in and look at the work and satisfy themselves and I do want to speak for that until they actually get in here and take a look at what we've done over the last few months.

Understood. That's helpful. Thank you for taking the questions and, John, good luck with your retirement.

Thank you.

Thank you. And our next question comes from Steven Alexopoulos of JPMorgan. Your line is now open.

Good morning, everybody.

Hey, Steven.

Hey, Steven.

I'll just start first regarding, Raj, all your commentary about bringing loan and deposit growth into equilibrium next year, right, when you think about it, there's two ways to do that: you could raise deposit growth or you could lower loan growth. Is all of the focus here on raising deposit growth? Or could we see loan growth start running below, call it the $900 million level we saw this quarter as you work to bring those into equilibrium?

Steve, my ideal situation would be to get deposit growth to come up very strongly, but at the same time, until we actually get there, if, God forbid, we keep doing what we've done this quarter where we keep lagging, eventually, you know, you can't keep doing this. You can't get your loan-to-deposit ratio keep going up and up and up. So I'm hoping the answer is that we'll just get deposit growth up in a very strong way quickly, and that's what we're trying to solve for.

Okay. And, Raj, what do you think the new team could realistically do in 2017?

I am in the middle of sitting down with, not just that team, but every team in the Company, to figure out what 2017 will look like and we will give you that guidance in the next earnings call. But I will say what I've said many times in the past that for this new business, success is not measured in a few hundred million dollars, but in a few billion dollars.

Got it, yes. Okay. And how are you think about potential using M&A to bolt on more low-cost deposits?

I'm not thinking about it much.

Okay. Well, that answers that.

We've talked about this and we've looked over the years for opportunities like, and frankly, tough to come by. Most mid-cap banks, as you know, are running at or close to the loan-to-deposit ratio that we have so there's not a lot of institutions around that provide an enormous amount of deposit liquidity at this point in the economic cycle.

Okay, that's helpful. And maybe just one final one. Can you just give a little more color on the strong growth in the national business? Was that all mortgage warehouse this quarter and should we expect that to be the primary source of the mix moving forward? Thanks.

No, I think it was spread out. We end up talking about warehouse because it's kind of the new toy. But that doesn't mean that.

Pretty well.

Clinical did pretty well as well. Residential had decent growth and SBA, which is, I know, more of a fee business, that also had decent growth. So, it's spread out.

Had a little bit of growth in the operating lease portfolio this quarter, which we haven't had in a couple of quarters now, but that seems to be getting some traction again. So it's pretty spread out.

Okay. Thanks for all the color, guys.

Thank you. And our next question comes from Brady Gailey of KBW. Your line is now open.

Good morning, guys.

Good morning, Brady.

So I know, I think, last quarter the CRE-to-capital ratio is 287%. Where did that trend to in 3Q? I know you said it was less than 300%.

It's not much different. It's maybe low 290%s or something. I don't have it right in front of me. I'm looking at somebody who might and might be able to hold it up for me to see or not. No? We don't have it right in front of us, sorry.

It’s pretty close.

It’s pretty close and we are projecting it being somewhere in the 290%s at the end of the year based on what we know today, so it 's creeping up, but…

Okay. And do I remember right that 95% of ya'll's taxi book is in New York?

Yes.

Correct.

Okay. All right and then lastly for me, are you all seeing South Florida real estate starting to roll over? The reason I ask I wonder if that drove the increase in the qualitative factors for the reserve.

No, A, question one, no, we're not seeing that. In fact, we continue to see increases in both residential and commercial price indices, and you may have missed, but I did give some elaboration on what drove the increase in the qualitative factor and it was a downward revision in U.S. GDP growth.

Okay, great. Thanks for the color and, John, good luck in retirement.

Thanks Brady.

Thank you. Our next question come Brian Horey of Aurelian Management. Your line is now open.

Thanks for taking my question. In the past, you've given the stat on the taxi book of loans that had debt service coverage less than 1.0. Can you update that?

Yes, actually, Steven asked that a minute ago. It's right around 52% based on our new evaluation of data coming down from the TLC.

Okay. And you have a number for the taxi loans graded substandard?

I do if you give me one second.

Okay. Maybe I'll ask another one while you're doing that.

It almost $142 million of which 54 are non-accruing and the rest are still performing.

Got it okay.

Even some of the $54 million that's non-accruing are technically current, but there ones we're particularly concerned about, so we've gone ahead and put them on non-accrual.

Okay and assuming you remain at an impasse with the borrower on the one troubled loan, what do you think the timing on a foreclosure and liquidation of the assets would be?

I believe we've already started taking some legal action, but what the ultimate timeline is, I don't know, and it may be that as a result of us starting to take some legal action, he comes back to the table, so.

Okay. Thanks very much and, John, congrats on your career and enjoy your retirement.

Thank you.

Thank you. Our next question comes from Gerard Cassidy of RBC.Your line is now open.

Thank you. Good morning, everyone.

Good morning.

Hi Gerard.

Raj or Leslie, can you share with us, I believe national loan portfolio is about $5.7 billion of which $3.4 billion is the new resi loans. And the remaining portion, can you break it out by the other categories that are included in the national portfolio?

Sure. So let me start by saying residential, the total resi in the Company is about $3.3 billion, but the national piece is $2.9 billion….

Okay.

Florida and New York. So next is Pinnacle, which is our municipal leasing business. That's about $1.3 billion. The franchise business is about $462 million. The equipment, the transportation finance business is $978 million. That includes loans and the equipment that is under operating leases. The warehouse business outstandings was $336,000, and SBA, our latest is at $213,000.

Great, thank you. Obviously, your stock is down today partly due to the taxi medallion issue. And it looks like it's down over $1.30, so over $100 million of market cap has been hit. Have you guys considered just selling this whole portfolio maybe in the fourth quarter, doing the cost-benefit analysis of what it's going to cost you over the next two years of attorneys fees, your guys time being distracted working on this, for a portfolio, as Leslie pointed out, is so small relative to a whole picture here?

Gerard, we have not done a very serious deep dive into that because we've always thought that there isn't a market for it, but if we see a market developing or even if we think there might be one in the future, we will look at that. But to date, it's been more of a high-level discussion point but we haven't really sit down and done the math on it, but we will do it if we see there's an opportunity out there.

Great, thank you.

Thank you. And our next question come from Matthew Breese of Piper Jaffray. Your line is now open.

Good morning, everybody. Just staying on the taxi medallion portfolio, what market there is, could you talk about that a little bit and who the incremental buyers of taxi medallions are and whether or not these buyers are bringing any cash to the table or are the financing terms essentially 100% LTVs?

So what we know, first of all, there aren't that many data points. Over the last six months, there have been 19 sales of individual medallions in New York that been reported at an average price of $572,000 and 22 sales of corporate medallions at an average price of $659,000. We don't have deep color into all of those transactions, but we do have information about some of them and the ones we know about cash has been brought to the table, the purchases have been by guys who have been experienced operators and the financing terms of what you would consider to be, I would say, normal, which is actually encouraging to us. They don't seem to have been fire sale transactions and the borrowers that we – the transactions that we can get some transparency into, it looks like the borrowers have brought cash to the table and the financing terms have been what you would consider to be reasonable. So that's been encouraging, but there still aren't that many transactions, which is not encouraging.

Right. And then, behind the scenes, on the corporate portfolio, what are you seeing for the new monthly corporate lease rates and has there had been any stabilization on that cash flow?

You know, I do have that information, but not in front of me. But if you really want to see that you can get it off the New York taxi commission's website. I don't have it in front of me. We do have that information. I just don't have it with me right now. It all factors into the analysis that we do, the cash flow analysis that we do every quarter.

Understood. That's all I had. Thanks for taking my questions.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. John Kanas for closing remarks.

Appreciate all of the questions and your interest in the Company. We will continue to – Gerard brought up a very good point and while we have talked about that, we've always been of the opinion that there probably wasn't a reasonably sound market out there, but we will a little bit more work. And I'd remind you that the book value of the Company is almost $23 a share now, so even with regard to this taxi issue, stock's trading pretty cheaply. So, we're feeling good about the balance of the year and, going into 2017, we will concentrate on this taxi issue and see what we can do, but the good news is that everything else seems to be hitting on all cylinders and we are encouraged by what we see out in front of us over the next quarter, particularly with regard to deposit growth, which I think is going to come in even better than we had projected. With that, I think we're closed and I thank you very much for your attention and talk to you in 90 days. Bye.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.