BankUnited, Inc. (BKU) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2019 BankUnited Inc. Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Susan Greenfield, Corporate Secretary. You may begin.

Thank you, Gigi. Good morning, and thank you for joining us today on our first quarter 2019 earnings conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call contains forward-looking statements within the meaning of the U.S. securities laws. Forward-looking statements are subject to risks, uncertainties and assumptions, and actual results may vary materially from those indicated in these statements. Additional information concerning factors that could cause actual results to differ materially from those indicated by the forward-looking statements can be found in our earnings release and our SEC filings. We do not undertake any obligation to update or revise any such forward-looking statements now or at any time in the future. With that, I'd like to turn the call over to Raj.

Good morning, everyone. Welcome to our earnings call. We're happy to report another very solid quarter. Net income for the quarter came in at $66 million or $0.65 a share. To remind you, this is our first nonloss share or post-loss share quarter. Earnings. Comparable earnings first quarter of last year, if I compare that to nonloss share earnings, they were $0.54 at that time. So in a year, to go from $0.54 to $0.65 is remarkable in my opinion. Deposits grew about $205 million for the quarter, of which $143 million was noninterest-bearing demand deposits. That's been our story. That's what we've been pushing for the last 5 quarters, and we've had tremendous success in growing DDA when, I think, most of the industry is struggling with not just growing DDA but even keeping it flat. Now DDA represents about 15.9% of our total deposit base. I think five quarters ago, when we started the switch, we were at about 14%. Loans and leases grew by $390 million for this quarter. That number, honestly, is actually higher than what we had expected. First quarter is -- if we go back and see our first quarter every year for the last 3 or 4 years, first quarter is our slowest quarter when it comes to loan growth. So $390 million is actually better than our own expectations, to be very honest. I thought -- if you asked me 2 months ago what I expected from the quarter, I would have said probably $400 million of deposit growth and $200 million or less of loan growth. The numbers actually came out the opposite. But nevertheless, we're very happy with where we came out in growth terms. Share buyback, which was approved last quarter, we started executing on it after we got approval from the Fed, which was middle of the quarter. So we only executed on 1.1 million shares and bought back about $40 million worth of stock at an average price of $35.91. Loss share is now terminated. NIM for this quarter came in at 2.54%. I think we gave you guidance of between 2.50% and 2.60% for the year, so it's kind of right smack in the middle of what the guidance was. Cost to deposit increased to 16 basis points -- 267 basis points, which was up by 15 basis points from last quarter, and this is mostly from the Fed rate hike that happened in December. So it was felt basically at the end of last year or very beginning of the quarter, and this had about 15 basis point increase. I think this compares to our 17 basis point increase last quarter, which was the result of the Fed increasing in September. A couple of quick comments about the economy and competitive pressures. The economy is very healthy. This has become kind of like a boring part of the call. I really have nothing new to say to this compared to what I've said over the last few quarters. Economy is coming along just fine both our markets, so we don't see any issues. Payoffs has been another part of the story, and I will say payoffs have been somewhat the same. I would say, some good news compared to last year in CRE, so we saw a little bit better story on the payoff front with -- in the CREs landscape. On C&I, they still are elevated, and it's really hard for us to predict where they will be. Production for the quarter came on right exactly where we had expected and also very much in line with what we've done last year. Pricing pressures, from a competitive perspective, I'd say it continues both in the lending and the deposit side. I hope that by now, deposit pricing would have eased off. It did feel like it was easing off for the first 2 months of the quarter. However, in March, we, again, saw, as we got towards the end of the quarter, the last 2 to 3 weeks of the quarter, we saw again an increase in pricing pressure, probably because of quarter end. I quickly want to talk about what we are referring to as BankUnited 2.0. This is a project that you've been hearing from us for the last 3 or 4 months. It started back in October. We went through -- this project is in 3 phases: The first phase was in fourth quarter. The second phase of it, which we talked about, was -- we just wrapped up in the first quarter. And the final phase has started -- and this is the implementation phase of all that we've planned, and we're going to start executing on it. And this will be the longest phase in terms of the time line and will go all this year and all of next year. Some of the benefits of this have already started accruing, but obviously, most of it will accrue as and when we execute across this implementation phase. The total run rate of the benefits that we've shared is $60 million. $40 million of it is expenses and $20 million of it is revenue opportunities. Both these numbers are pretax numbers, of course. If you -- a number of times, we've been asked what is sort of the final run rate of ROA and ROE that we expect after we layer all these on. Our current ROA, ROE this quarter were 82 basis points and about 9%. We have a buyback that is ongoing, and we expect to get that done certainly over the next few months. If you layer in the buyback and you layer in -- and just simple math, just layering in the $60 million benefit that we expect to accrue from BankUnited 2.0. That should get us to about a 1% ROA and about an 11% ROE. That, again, goes without saying that that's leaving everything else as is. So no improvement or otherwise in the economy. No changes to the curve. No changes to growth rates and so on. Just simple math. Just take the 82 basis points and the 9% and layer on the buyback and the $60 million gets us to that level. Now depending on what happened in the environment, it'll probably be better or worse or maybe the same. But that's what we're expecting. That's our best guess right now. I want to quickly talk about what BankUnited 2.0 is and where all this is coming from. So this did not start as just a cost exercise. We did not go out and say, let's try to figure out where we can just squeeze cost and to improve our profitability. We really took a very comprehensive view and said, let's look at everything we do in the company across the board and see what is it foundationally that we need change to have more efficiency and effectiveness? But also to have a better client experience, have a better employee experience and to build the foundation that is necessary for the next 5 years of growth. We're going to celebrate our 10-year anniversary in a month's time, and big moments like that make you stop and take a longer-term view. And so it really was an exercise in making sure that we have the right foundation to be successful over the next 10 years. So it really came down to a complete organizational redesign of the company. Our company up to today was really designed around geographies. It kind of evolved around geographies. We launched Florida 9 or 10 years ago. We launched New York about 5 years ago. We launched various national businesses along the way. And the entire org structure became about the north bank and the south bank and the national entities. And the first thing we did was question if that is the best way to be organized from a client perspective. And the answer was no. We need to be aligned and organized more around customer needs and customer segments. So we have reorged the company, the front line to be more functionalized. So there's a C&I business line, a CRE business line, small business and so on. Corresponding to that reorg was a complete reorg of everything that supports those front lines. So whether it's a credit function or any other staff function that supports them have agreed realigned as well. In doing that, you get much more effective at responding to client needs. Your speed of origination, your speed of service goes up dramatically. So it's a great client experience. There are other cost benefits to doing that. So when you have little pods in different parts of the company, that's a very inefficient structure. When you consolidate things and make them in -- bring them into one business line, there's a lot of cost benefit that is where a lot of that $40 million is coming from. There are regulatory benefits to doing that as well. Because when you have different parts of the company doing the same thing in slightly different ways, there are obviously places where there is errors that happen, that there are cracks that appear. And when there are audits or examinations, you end up finding or doing things just a little bit different in different parts of the bank. And then the quality suffers, and that's not good on the regulatory front. So that would help us mitigate those issues also. And very importantly, it actually drives one culture in the company. We're not a company that is built on M&A. Very often, companies that have been put together through M&A tend to have this issue that there are multiple cultures inside one company. We don't have that burden, and yet I feel from time to time that there are multiple cultures, more coming from just the fact that we are designed -- organized around geography rather than around business lines. And we're trying to break that and have one culture across the company. I want to make a big point here that this is not an exercise where typically, when you see companies taking out cost, there's a hiring freeze, and there is a freeze on investments in technology and talent and so on. We are absolutely continuing to invest in technology. We're continuing to invest in talent. We expect to hire -- there are a lot of open positions that we're hiring for right now. And while net -- on a net basis, you will see a reduction, but that doesn't mean that we are doing silly things like having hiring freezes and other things that very often, large companies do when they're doing through this. So this has created a lot of excitement within the bank. Like I said, we have started executing on some of this already, and you will see benefits of this starting to creep into our numbers every quarter over the next few quarters. All the projects that comprise BankUnited 2.0 are expected to be done by the end of next year. So all of this, this is not some very long-term deal. This is basically rest of this year and all of next year. But by the end of 2020, all this is baked in and achieved. With that, I'm going to actually turn it over to Tom to talk a little more about the quarter. And then Leslie will get into the numbers, and then we'll take your questions.

Great. Thanks, Raj. So as Raj mentioned, we were pleased with the quarter from the loans and lease growth perspective. We had $390 million for the quarter. A little bit more detail I wanted to provide on how different lines of businesses performed within that $390 million. So our residential business grew by $100 million, which included $47 million of Ginnie Mae buyout loans. Our C&I businesses, really across the entire platform, had an excellent quarter growing by $238 million. And this included our core C&I business in the banks, our Bridge Funding commercial finance business and our mortgage warehouse business. A little bit on the commercial real estate side. While the net number was $55 million for the quarter in terms of overall growth, that included a $49 million decline in multifamily loans, which kind of continues our strategy that we talked about over the last couple of years, and also a $12 million reduction in land and construction loans. So when you back that out and think about the segments of the commercial real estate world that we're really trying to focus on as part of our strategy shift, we grew the overall CRE business, excluding those 2 items, by $120 million for the quarter, which is actually one of our best quarters recently in terms of overall CRE growth. So all in all, I think the loans and the growth that you see is really reflective of the shift in C&I strategy, asset segment in the CRE side and our residential growth strategy. As Raj mentioned on the deposit side, our growth trend continued in noninterest DDA. It was 70% of our overall $205 million in growth for the quarter. So we continue to focus on that heavily as part of our relationship, sales and planning processes. Our deposit cost grew by 15 basis points to the quarter versus 17 the previous quarter. And we expect to see continued improvement of that as we continue to focus on our noninterest DDA sale strategies across the entire footprint in every line of business that we're in. So overall, that's a summation on loan, lease and deposit side for the quarter. And with that, we'll go to Leslie.

Thanks, Tom. I'm just going to provide a little bit more color on the quarterly results. Net interest income declined by $56.9 million compared to the first quarter of the prior year. And the NIM decreased to 2.54% from 3.56%. These decreases were exactly in line with our expectations given the termination of the loss share agreement and the final portfolio sale of covered loans that we executed in the fourth quarter of 2018. Yields on both noncovered loans and securities increased when compared to the first quarter of the prior year. The yield on noncovered loans increased to 4.50% for the quarter from 3.83% for the comparable quarter of the prior year, while the yield on securities increased to 3.64% from 3.04% for the first quarter of the prior year. The duration of the securities portfolio declined slightly to 1.31. The curve continues to worsen, and that is having negative pressure, as you can well imagine, on the margin. We guided last quarter to a range of 2.50% to 2.60%. Given where the curve is today and the tight pricing we're seeing in the loan world, I would expect that to be -- end up near the low end of that range for the year, unless we get some help somewhere. Deposit cost growth. We do expect deposit cost to increase for the next couple of quarters but at a much more moderate pace than we saw this quarter and last quarter. A couple comments on reserves and the provision. Nonperforming asset, nonperforming loan and net charge-off ratios as well as the ratio of the allowance to loans and nonperformers really remained almost right on target, very consistent with where they were at 12/31/18. The provision was $10.3 million this quarter compared to $3.1 million for the comparable quarter in the prior year. A few factors led to the increase in the provision: one, just higher loan growth. We only had about $66 million of loan growth in the first quarter of 2018, so providing for that growth was a factor. We had an increase in the level of specific reserves also and some increases in some of our qualitative factors. With respect to the increases in specific reserves, there's just 2 or 3 kind of one-off idiosyncratic loans. Nothing that we're seeing -- not concentrated in any one part of the portfolio and certainly not seeing any negative credit trends in the book. With respect to forward guidance, we continue to reiterate our guidance of mid- to high single-digit loan and deposit growth for the year. I just spoke to the NIM. We had previously guided to low single-digit growth in noninterest expense for 2019. I'm going to bring that down. We expect all in, even including the professional fees that we're paying and whatnot for 2019 noninterest expense to be about flat to 2018. And then we would see that decline even further in 2020. A quick comment about the effective tax rate. We -- I'm going to say now, for the year, I'm going to guide to about 25% in the aggregate. That's a little higher than what we guided to last quarter, and mainly because we revisited all our state apportionment factors and state tax positions. And that led to a little bit of an increase in the expected ETR. That's all I have. I'll turn it back over to Raj for some closing remarks.

We've been consumed with BankUnited 2.0 for the last three months. That would be an understatement of the day I said that, but it also has fueled a lot of energy in the company. And I'm not just talking about the three people who are here talking to you, but across the board, about 50, 60 people are working on this day and night. And this will fundamentally change who we are and make us a much stronger and better company. So we're very excited about it. My team last night told me to contain myself and not keep talking about that, so I'll shut up and -- but if you'll let me, I will go on for the next 3 or 4 hours. And I think I'll let you get to questions.

[Operator Instructions]. And our first question is from Ken Zerbe from Morgan Stanley.

Certainly good to hear the details around the, I guess, the profitability improvement. In terms of the expense reduction, the $40 million, how much of that actually falls to the bottom line? And I guess sort of along the same lines is -- and I think, Leslie, you mentioned that you could see a decline in 2020. But presumably, a decline is sort of also offset by other initiatives and other expense growth.

Ken, currently sitting here, I actually expect total noninterest expense for 2020 to be lower than it's going to be in 2019. Even given some of the reinvestment that Raj mentioned that we're going to be making in technology and talent, I actually expect it to go down, Ken.

Are you able to quantify that? Just so we have sort of a benchmark of how much of that $40 million does fall to the bottom line.

So Ken, think of it like this: Expenses do go up to the extent that you are growing your balance sheet. If we were not doing this, expenses -- we try and keep expense growth lower than what balance sheet growth is. That's been our model for many years. So whatever expectation there might be of balance sheet growth, I'm not going to make a judgment for next year what it might be. But whatever you are expecting that to be, expense growth will be a little less. But then on top of that, you should layer on about $40 million of reduction. Again, not to be achieved right away. This will take, like I said, all of this year and next year. So by the end of next year, we will realize net cost savings of $40 million.

So you'll see that in the run rate in 2020, fully baked into the run rate in 2021, not in 2020. And Ken, as we get further down the road this year and closer to the end of the year, we'll be able to give a little bit more specific guidance on what we actually expect 2020 to look like.

Okay. No, that's helpful. And then the professional fees, kind of along the same lines, obviously, because that did drive up expenses a little bit. Is there any residual professional -- higher professional fees in the second quarter before those start to go away?

Yes. So I would expect it to remain similarly elevated through the end of Q2 and then come down in Q3.

Got you. Okay. Perfect. And then just one final question. Raj, I think you mentioned that you're going to finish up your buyback program over the next couple of months. If I'm not mistaken, I think you have about $110 million remaining. Is that full $110 million the amount that you're thinking of repurchasing in 2Q?

We have a program in place and like -- saying what I said in the last earnings call. The higher the stock price, the slower it goes. The lower the stock price, the faster it goes. It did start a little late because we were awaiting Fed approval for it, which came about, I think, in mid-February, if I'm not wrong. And we did stop it just before our blackout. And the reason we stop it is we want to share all of this information as this was gelling and coming together, and we will start it again in a couple of days after our blackout expires. So hard for me to say exactly how many months, because I don't know what the stock will do.

Our next question is from Dave Rochester from Deutsche Bank.

Appreciate all the color on the new plans. This is a follow-up to Ken's question on the expenses. With some of that benefit coming into the end of 2020, it sounds like -- I don't want to get too far ahead here, but you'll still have some of those expense saves hitting for 2021 as well, so another low expense growth rate or no expense growth for 2021 as well. So flat in 2019, down in 2020 and then a really low expense growth rate for 2021 is how we should think about it.

It's probably a good way to think about it. But remember, the base expenses also are a function of what happens with the balance sheet, how fast it is growing or not growing.

Okay. Great. And just on that point, you are assuming loan and deposit growth maybe a little bit below your guidance for 2019 right now for mid- to high single digit. You were talking about mid-single digit. But it seems like given some of the enhancements you're talking about, these efforts would just enhance your ability to grow. So just you have any thoughts on that.

Yes. I think, obviously, everything we're doing, especially -- we were talking about the $40 million. We haven't talked yet about the $20 million. That's equally important. That's revenue growth on top of what we were expecting. So all these initiatives are designed, not just to improve our efficiency ratio, but they're also designed to actually help us boost revenue, both fee income as well as NII.

Okay. And then just based on the return goals, it looks like there was implied capital levels that are pretty in line with where you are today. Is that sort of what you're expecting to stabilize these ratios here after buyback? Or you're thinking it will bring us down further.

Dave, we've spoken before to kind of the constraining ratio being TCE to TA and wanting to solve for about 8%. So there is still a little bit of runway there, and that's how we think about it.

Okay. And then just one last one, a clarification point on the tax rate. The guide is for 25%. It was obviously higher than that this quarter. So you're thinking something closer to like 24% for the rest of 2Q through 4Q.

Dave, there can be discrete items that hit in any one given quarter for a variety of reasons. But I think for the year, it will average out to 25%.

Our next question is from Ebrahim Poonawala from Bank of America Merrill Lynch.

So just one follow-up. Sorry to go back to expenses. Just want to make sure we have this clear. When you think about the flat expenses in 2019, you're looking at the $480 million in '18.

Yes.

Right. And I get your point, Raj, about investing in the franchise. But based on kind of what you laid out around macro assumptions, balance sheet growth, should I be -- or should we expect that absent any upside surprise on growth, expenses should be closer to that $480 million minus $40 million, $440 million as we look to 2021. Or is that too aggressive?

So I think, Ebrahim, that may be a little too aggressive because you are going to have -- employees all get merit increases every year. There will be some investment in technology that will start to run through the P&L over time. To Raj's point, the balance sheet is going to grow. With growth comes a little bit of addition to the expense base. Now we're doing some things that I think will make that ratio far more favorable than it's been in the past. But I wouldn't assume there won't be anything going the other way. So that might be a little too precious.

Expenses -- if we were not doing this, expenses will be growing at 3%, 4% a year if balance sheet was growing in mid- to high single digits. So build your model based on that minus the impact of the $40 million from BankUnited 2.0. That's how I would build the model.

Yes.

Perfect. Understood. And just separately, Leslie, on the margin NIMs, it seems like given where your cost of deposits are, the incremental balance sheet growth should be accretive to the margin. So just trying to understand that there -- how sensitive your margin should be to the yield curve. Like, if could talk about where are you seeing new deposits coming into the bank on a blended basis versus loan origination yields.

Yes. Do you want to?

Yes. So new deposits are coming into the bank. They don't really move the needle so much. Think about what we generated this quarter, right, $205 million, 70% of it being DDA. So the news over there is great because the mix is so good, but it's not going to move the needle in any given quarter on a $20-plus billion base of total deposits. So what is more relevant is the existing book, how is it getting repriced or not? So while there is -- obviously, there'll be repricing in the CD book as it rolls off. CDs originated a year or 1.5 years ago, as they roll off, it will roll off into a higher rate because the interest rate environment has changed. There'll be some residual increases here and there in money market, but it is now beginning to wind down. We're seeing much better numbers this early in the quarter than at any time in previous quarters. So that 15 basis points that you saw should be a much lower number, but it will still be a positive number. And in other words, deposits are still going up, just not going up at the speed of 15 or 17 basis points a quarter.

While pricing has been tight, there's also an interesting phenomenon where, over the last quarter, three months LIBOR has actually gone down unlike LIBOR and Fed funds heading up and well correlated over the last couple of quarters. All of that and the shape of the curve, again, leads to the guidance. I think we'll be at the low end of that 2.50% to 2.60% range for the year given what we see today.

And got it. And just all tied to that, is your expectation that the margin bottoms out? Like, given -- if the yield curve remains where it is, should we see some margin expansion in 2020? And is that kind of included in your revenue outlook for -- as part of BKU 2.0?

I think the keyword that you said is if the yield curve bottoms out. Every time we say it, it only gets worse, so I think we're jinxed. It is highly correlated with the curve -- with the slope of the curve. I mean this phenomenon that Leslie is talking about, it hurt us this quarter. Loan yields did not move up even though roughly half our book is floating rate book, and you see that it should have been a much higher change in yield in loans. But it did not because most of our commercial loans are tied to three month LIBOR. And three month LIBOR actually went down, three months and 1 month. And the deposit costs are tied to Fed funds. They're correlated with Fed funds much more. So there's the disconnect over there, which wasn't there even three months ago. And that causes margin -- and I have no way of predicting what will happen over the next nine months.

I mean, Ebrahim, conceptually, what you say has merit. I just think there's so many factors that could impact it that we can't control.

No, understood. And what's the loan portfolio that's tied to the 3-month LIBOR, Leslie?

I mean about half of our commercial loan portfolio is floating rate. And the majority of that is tied to LIBOR, 1 month or 3-month LIBOR.

And our next question is from Jared Shaw from Wells Fargo Securities.

Just on the expense side. Is the $14 million restructuring charge, is that included in your guide for flat expenses? Or would that be in addition to that?

Yes. No, that's included. And I would also say it's not really a restructuring charge. It's a variety of different things that are going to happen that are going to hit the P&L over the course of '19 or '20. But yes, I did include that in the guidance that I gave.

And as those come in, will you break those out?

Yes. To the extent they're significant, absolutely. And I mean it'll be things like branch. If we close a branch and have to pay a lease termination cost, for example, it'll be those kinds of things. And yes, to the extent they're significant in any given quarter, we'll identify them.

The total is $14 million, but it will be spread out over the 6 or 7 quarters, yes.

Yes. And then as we -- as you look at the -- as we look at those core expense savings and the revenue enhancements, should we expect that those are layered in throughout the next 7 quarters, 6 quarters? Or should we really expect that those are more back-end weighted as you implement the plans?

No. They'll start to come. I think you'll see more of it in 2020 than in 2019. But certainly, some of it will be in the back half of 2019, and we'll give you updates as to progress towards those goals on a regular basis.

Okay. And then on the revenue side, does that anticipated any new lending lines? Or is that really just rolling out more, like you said, the treasury management and doing more with the customers you have? Or should we expect that there is some additional new business lines coming online?

No. No. This initiative does not come from -- taking on new risk and getting into new business lines. We always have the option to do that, but that's not what this is based on. This is basically without changing the risk appetite of the company, without changing our risk profile, how do we do what we're doing already better? How do we penetrate customers that we have better? How do we -- we look at fee waivers and where can we tighten things up. Looking at our fee schedule, how can we improve that? So it's taking our existing businesses, our existing business line and actually doing that better, rather than new business lines.

Okay. And then on the capital side looking at -- should we really look at that 8% TCE ratio as a goal? Or is that more of how you're sort of level setting the balance sheet? But once we're through this existing buyback, should we be assuming that there's additional buybacks that come in behind that to target that 8% longer term?

I mean at the moment, yes. That's how I would think about it, is targeting that 8%. Now if that changes, we'll let you know. If that changes, we'll let you know. The thing that could change that probably is something -- we start to see something deteriorating in the economy, we may decide to hold onto more of that capital. But for now, that's how we think about it.

Okay. And then finally, just for me, on the -- is there any potential for additional future tax recoveries, like we saw a few years ago when you were able to get the federal tax refund for the 2012 to 2017 years?

So I'll say the same thing I've always said about that. We're working on it, but I would not consider that probable. We'll -- if anything develops on that front, we'll let you know, but I would not consider that probable. I think it's a long shot.

Our next question is from Brad Gailey from KBW.

It's Brady. I wanted to start, Raj, and I think I heard you say that, yes, the $60 million impact should be fully realized by the end of 2020. And I know in the slides, you talked more about the impact being mid-2021. So I just wanted to clarify. Do you think when we look at the year 2021, that $60 million will fully be in that number? Or is 2021 still a partial year?

2021 should have the full impact of $60 million.

Okay. And then when you talk about seeing 1% ROA and the 11% ROE in 2021, is that -- you hope to hit that run rate? Or you think the full year will be that for 2021?

Well, it'll be the same thing because that'll be part of the run rate for full year basically.

Yes. We think we'll get there, Brady, in 2021.

We'll get there, by -- yes.

All right. Then, Leslie, and I know in the press release, you talk about how a lot of the increase year-over-year in professional fees is driven by CECL and what you have going on with the expense program. Can you quantify how much of the expenses in 1Q were driven just by this expense plan, which are kind of considered onetime in nature?

Yes, about $5.6 million.

Our next question is from Steven Alexopoulos from JPMorgan.

Just to start on the 2019 expense outlook for flat, how much of the $40 million expected cost saves do you assume are in the run rate, say, by 4Q '19 underlying the flat outlook?

You want to take that?

No. Steven, I think we've -- actually aren't prepared to put that number out there yet. This is still all gelling in terms of exact timing of when we're going to see some of this materialize. And what we'll do is we'll give you quarterly updates about how far we got with each of these initiatives as we go down the road, but it's still kind of all -- we just finished the design phase. It's all gelling right now. And so I'm a little hesitant to put exactly how much of it will be baked into 2019 quarter-by-quarter quite yet.

Quarter-by-quarter.

But we will give you quarterly updates on where we are.

Okay. And there seems to be a large reinvestment component to this. That $40 million is a net number, correct?

Yes.

Yes.

Okay. So Raj, this quarter, you reported an ROA of 82 basis points. Peers is around 1.2%. Based on the analysis you just went through, what are the top reasons why your ROA is so low versus other banks? And is there anything structural that should stop you from -- at least over time, getting to at or above peers?

Sure. The #1 reason is deposit cost. I would say, 75% of that why our market is 2.50% and not 3% or 3.25%, it's really deposit cost. Second is the chosen model that we have, which is not a fee-based model. So it's -- we don't have a lot of businesses such as wealth management or other fee-based businesses, which tend to drive the fee income line. But #1 reason is deposit cost. And why deposit cost is fundamentally higher in our franchise versus others is we're not an M&A machine. We did not roll up banks with depositors and deposit accounts that are many decades old. Everything that you have here is organically sourced and originated the good, old-fashioned way over the course of the last 3, 4, 5 years. And that tends to generate a higher deposit cost than if we had an inorganic strategy. It also tends to create higher tangible book value. We've had a very nice growth in tangible book value in the last -- in our first decade of existence, starting at $10 when we started the company to closing around $30 a day. The flip side of this would have been if we have done 5 deals that we -- over the last 10 years, our tangible book value would have been probably $20, but our deposit cost would have been a lot lower and much more in line with our peers. But we've always protected tangible book value as -- and always chosen to just grow it the old-fashioned way. So our higher deposit cost, we could think of it as customer acquisition cost that is sitting in our margin versus sitting in a good will line.

Yes. Okay. And then it's interesting commentary because most banks your size or even larger talk about needing to be much larger, right, to add more scale to be a deal. Given what you just went through, I'd love to hear your thoughts on this. Do you need to do a deal to get more scale to be competitive?

No, I don't think so. I think if that was the case, if scale got you the power of innovation, I don't think fintechs would exist. I don't think banks like Live Oak would exist and differentiate themselves on technology. I think that what distinguishes innovative -- or technologically whether -- a company from another one is actually talent and emphasis of senior management on technology. Scale, yes, it'll help marginally, but it's not what gets in the way of success. I truly believe that. And there are companies that are much smaller than us that are more innovative than us. And there are companies much larger than us that cannot even block and tackle the basic stuff. So it would help. I'm not completely discarding it. It would help to spread investments over a larger base, but that's -- it's not what is getting in the way of success.

Our next question is from Lana Chan from BMO Capital Markets.

Most of my questions have been answered. But just on your securities yields, you had a pretty nice linked quarter increase this quarter. What are the new securities being put on that right now?

Lana, I don't have that in front of me.

No, we don't have that in front of us. But if you call Leslie, we'll try and -- yes.

I'll talk to you, yes.

Okay. Sure. And then, I guess, the other follow-up is on the -- you talk about competitive loan pricing this quarter. Could you give us a sense in terms of what the also new loan yields are coming in on some of the commercial portfolios?

Yes. Lana, the production came on at about 4.9% on average for the quarter in the aggregate.

Our next question is from Stephen Scouten from Sandler O'Neill.

Curious, Leslie, you mentioned the $5.6 million number to Brady's earlier question related to costs in the quarter. Is that $5.6 million included in the $14 million that you noted in the presentation? Or is that $14 million incremental?

No. Good question. No, that $14 million is incremental. That's not including the professional fees.

Perfect. Perfect. And then, Raj, on the $20 million in kind of revenue enhancement opportunities, can you give any greater detail on where specifically you guys think that might be driven from in terms of -- and I know you said it wasn't new business lines. But kind of where those opportunities exist specifically within the bank today?

So there are numerous things. None of them are really any one big item, but I'll talk about the one which comes to mind, which is the biggest one. So we have been issuing purchasing cards or commercial cards to our commercial clients for some time now, but it's a program where we really don't -- we white label it. We get it from another bank, and we have a small revenue share, and we provide it as a convenience more than really as a profit generator for us. And we are going to bring that program in house. We just hired somebody only a couple of days ago to come and lead that program. He's coming from a money-centered bank, will be in New York, and will build this capability for us. It'll take us all of this year and probably into first quarter before we actually launch that, but that is something that came out of BankUnited 2.0. And we will start capturing 100% of the revenue as that portfolio builds. And we think by the end of next year, that'll be a meaningful number. But then there are other things, which are pretty routine, which is we're taking a very hard look and a hard stand on fee waivers. We love our customer service scores. Our customers love us. Our Net Promoter Scores are very, very high. But sometimes, they are so high because you're giving away the shop. That's not good for business. So at times, you do have to waive fees, but there are other times where you don't have to. So we're taking a hard look at that, and we've already captured some of that benefit, and that will be rolled as well. So it's a lot of little things that add up, but those are some of the -- small business initiative is another one, which is we have 85, 90 branches in Florida. And while we have done a fair amount of small business, we are not even scratching the surface here. So one of -- a part of the reorg that we announced only a few weeks ago was to focus more on small business, both in terms of the technology set we're building for our small business clients, but then also going after this segment from a sales perspective. It's been ignored, let's put it that way. And now we're putting it front and center, which will generate some more revenue.

I might also add that Raj mentioned the issue about how we created this book over the last 3 or 5 years predominantly. Organically, when we look at things like product sales, average product sales per client from a treasury management perspective, banks that have had relationship for 10, 20, 30 years have had lots of opportunity to pretty deeply sold into these relationships. When we look across our existing franchise and our existing relationships, there's substantial opportunities to focus on enhancing the number of products that we have per client from a cash management, treasury management perspective. So there's some pretty good income opportunities in that, too, and that's another part of BankUnited 2.0.

Great. That's really helpful. And it looks like you're down to about 80 branches in Florida and 5 in New York. Are you talking at all about what the optimal branch footprint looks like when you're done at end of 2020 with the BankUnited 2.0? If that's further reductions are built into those expectation?

There are some consolidations that are built into it. We generally don't announce it. But at the same, I will tell you we are also going to be opening a few branches. I think the next number will be lower from what it is today, but it's made up of consolidating where we have much more properties that have changed or our business has changed. But then also opening not just new branches, but different kinds of branches. We are about to experiment with a very new concept right here on our campus in Miami Lakes, which will be a much smaller branch. And I will invite you guys to come to Miami in about 3 months' time to take a look at it, but we will start rolling some of those branches out in key locations as well.

Okay. Great. And then just one last one for me on the balance sheet. Looks like borrowings were up a little bit and maybe some of that went into securities, up maybe a little over $200 million. What would you expect to see from growth in securities moving forward? And is there a strategy to still -- to be able to grow that at a high single-digit, low double-digit sort of pace?

So I don't think you should expect us to lever up the balance sheet with borrowings and securities. I would expect any excess of deposit growth over loan growth to likely to be invested in the bond portfolio. Raj made the point earlier that going into the quarter, our expectations were that deposit growth would be higher and loan growth would be lower. So you're seeing a little bit of having bought some securities in anticipation of that happening on the balance sheet this quarter. But no, you shouldn't expect to see us just lever up the balance sheet wholesale to buy securities.

Our next question is from Christopher Marinac from FIG Capital.

Chris Marinac at FIG Partners. Wanted to ask, Raj, about the relative deposit cost. I know you mentioned it in Steve's question a few minutes ago. But if you think out two years, should your relative deposit cost improve slightly or more significantly as you implement BankUnited 2.0?

Relative to who?

Relative to peers, relative to your banks in the midsize asset category.

It's hard for me to say because what -- part of the reason our deposit costs are higher are also that our depositors acted sooner. Does that mean that others who are acting later will be able -- is there catch up to do? I don't know the answer to that, right? I certainly see, as we look at our peers' numbers, and we're seeing deposit cost catch up. Do they catch up for longer than -- you could make an argument that if we've already priced our depositors to the leading rate, that there is not much to do versus others. There is probably more room to go. That's one theory. The other theory is that our clients are probably more price-sensitive than somebody else's and, hence, there will always be a difference. Where do those two things play out? And where does it end up? I'm not sure. What I will say is that as time goes on, our deposit book relative to where we were two years ago to where we will be two years down the road, I expect it to be less price-sensitive as clients get more embedded into our treasury products and just have a longer sort of relationship with us. We see a very clear indication that time -- or if you do a vintage analysis, clients who've been with you 5 or 6 years behave very differently than clients who have been with you for 5 or 6 months.

Yes. The other thing I would say to that, Raj has talked at length about the strategy to grow noninterest DDA as a percentage of the book. And when you look at some of our peers, particularly those that have variable deposit basis, noninterest DDA is a much bigger percent of the book. And that's as much of a driver of that as anything. And so our success in increasing that ratio will be one of the largest determinants of how much that gap closes, in my view.

I'd say, listen, growing DDA is the hardest thing in the world right now if you're a banker. And to have achieved what we have, which is $550 million of growth last year and $150 million almost this quarters over the last 5 quarters, we've really moved the needle. $100 million here, $100 million there, then suddenly, it adds up to real numbers. So -- and that has an impact. You fast forward 2 years and we keep having the success that we're having, that changes fundamentally the deposit mix, which will impact deposit cost.

Our next question is from Brock Vandervliet from UBS.

Just wanted to follow up on that last one. So are you -- how confident are you that your success with the noninterest-bearing growth this quarter can continue throughout the year? And how much of that was a seasonal impact?

Listen, it's not this quarter. It's the last 5 quarters, right? And there's a very meaningful difference between the last 5 quarters and the 3 years before that. So it's '15, '16 and '17. Each of those 3 years, we had roughly $100 million of growth. And then suddenly, it changed to $550 million last year, and we started this year with $150 million. So I never want to call out just one quarter at a time. I will tell you that our focus continues to be DDA growth. Would it be every quarter just like this? It's hard to say. It'll be less or more, but the trend should be in this direction. Will we again do $550 million? Listen, I hope we'll do much more than $550 million this year. I know we'll stay focused on it. We'll continue to pay our people for this, which is obviously one of the big drivers, and we'll see where the numbers fall out. But that is our number one priority. It's not loan growth. It's not any other thing in the company. It is DDA growth.

Okay. Great. And just as a follow-up. The New York multifamily, could you just remind us what the balance is? And what your estimate would be for the final runoff of that portfolio?

New York multifamily, as Tom said, declined again. Not a lot, but it did decline again this quarter. Tom, what was the number?

To $49 million.

Yes, the balance is $2 billion.

Yes. We're about $2 billion in balances right now.

Yes. We're -- as we look at the multifamily market, I mean, it has stabilized a lot in the last year. Today, we are making new multifamily loans. When we find the right borrower and the right project and the right economics, we are open for multifamily loans. Our strategy is to grow other sectors, as I noted in the numbers that I went through earlier, at a faster rate. But we would not -- we're not targeting per se at this point any further reduction in the multifamily space if we find the right loans that make sense.

Yes, we're not concerned about the concentration at this point. We don't have a number that we're trying to run it down to. It's all about, to Tom's point, the economics of the market and the loans that are coming to us for -- to look at.

Yes, the challenge in the multifamily market in New York is still that asset sales themselves are still down dramatically. So it's essentially more of a refi market than it is an activity market. And the economics of that are fairly challenging when you compare it to the other investors that are out in the nonbank market investing in this space.

Super helpful. And Tom, what would you say the rate is on your new originations there?

Multi, well, we didn't originate a lot of multi, so...

The market is at 4% or just a little under 4% right now for 5-year paper. It's looking at lifetime trend is plus 1.50. That's really where the market has been for the last several months.

Our next question is from David Chiaverini from Wedbush Securities.

A couple of questions. The first is a follow-up on the noninterest-bearing deposit growth. So is it mainly being driven by the changing of incentives at the bankers? Or have there been some new teams that have been hired that have been particularly successful on the noninterest-bearing growth side?

No. It's not new teams. It's existing teams, and it's pretty widespread across our businesses and across our geographies. Incentive plans do play a role, but almost equally important is the messaging in the company and a constant sort of drumbeat of DDA, DDA, DDA. Every meeting starting with the DDA prayer. Where is DDA? And did we get any yesterday or not? So that is really what has changed. It's not new businesses or new -- and we're also adding to the teams that we already have, but it's not like we've launched a DDA business on the side that we haven't told anyone about.

And I would also say it's a bit in the relationship planning concept as we think about target markets as well. There are -- we've had good success in certain types of industries that we have always been involved with, but some are more deposit-oriented and more treasury management-oriented than others. And as we think about this being the #1 priority, and as Raj said, we talk about it 73,000 times a day, this starts to get into everybody's mindset deeply. And we are prioritizing business development activities around DDA-oriented clients at the highest level versus in the past. We focus more predominantly on loan-generating clients. Today, this is kind of the number one battle cry.

That's helpful. And then one housekeeping question. How much accretion income was there in the quarter?

$11 million.

Our next question is from Matthew Keating from Barclays.

So my question relates to the branch savings, so the $9 million that's been identified. I know you mentioned earlier that the branch count will be down. I guess if you look over time, BankUnited's branch count's down about 2% since 2009. It's a lot less than the industry and certainly less than -- a lot less than our broader mid-cap bank coverage. So just wondering, where are those 9 -- where does predominantly that $9 million expense savings coming from if branch count's only down modestly? And if you can just kind of provide some parameters around that, it would be appreciated.

It comes from future branch closures net of, to Raj's point, some additional markets or areas that we may go into and open new branches. So that's really coming from planned consolidation effort, net.

Yes. And I would not look at 10-year numbers to really understand what it would look like. But I think 10 years ago, this was a field bank that we bought overnight. And the branch network was completely revamped. A better way to look at this might be to look at what has happened to branch count over 4 or 5 years. But looking at it from 2009, I think it doesn't make much sense.

Fair enough. As it relates to the profitability objectives that you've outlined this morning, sort of the 1% ROA and 11% ROE. The start of 2018, the bank had similar core profitability goals, so the 1% ROA and a 10% ROE. And so I guess what's your outlook after doing all this work with the consultants, et cetera on sort of the outcome of that? Were you disappointed that there wasn't more opportunity? Just appreciate your perspective there.

I think I'm very happy with what has come out of this effort, not just from a -- the $60 million perspective of how it is fundamentally changing our company for the better. In terms of what I may have said a year or 1.5 years ago about wanting to be at 1% ROA and 10% ROE, this is a different environment, and I'm not talking about the economic environment. I'm talking about the rate environment. The curve today is inverted. A year ago, it was flattening. It wasn't even flat. And 2 years ago, it was actually upward sloping. So there has been a big change in the rate environment. Not much we can do to it other than react to it, but that also drives our profitability. So this exercise that I just went through of taking our current ROA and ROE and layering on the $60 million and our buyback, getting us to 1% and 11%, the underlying premise is that all else stays the same. I don't know what will happen with rates tomorrow. I don't know what will happen with the economy tomorrow. If the economy turns, that will impact every bank. We think it'll impact us less than others, but time will tell. Honestly, I hope we never find out, and I hope it never turns. So there are factors beyond just this. $60 million is a pretty big number for a company our size. Even the $40 million in expense number, that's a little less than 10% of our expenses. And there have been recent transactions that have been announced where companies have come together to take out 10% or 15% cost. We're doing this without a transaction. So this is a -- it's a number that we feel very comfortable that we will achieve. We would not put a number in front of you that we don't think we will hit. Internally, I will hold the team to a higher threshold, but $60 million is what I feel comfortable sharing with you. And I'm pretty happy with the number. It's a big number for a company of our size.

The other thing that's important to remember, as Raj said, if the goal had been just to take out as much cost as we could possibly take out in the short run, maybe the number would have been larger. But that would have been a very poor, long-term strategy for the company.

No. It's very helpful color. And just a final question on Pinnacle. Last quarter, there was a bit of a drag. Still, I guess, municipal lending with tax reform was still sort of challenged. Could you maybe provide an update on the prospects for that business? We've heard that things might be improving in that market. And just appreciate any color you might have.

Yes. That business is still under pressure. It has marginally gotten better. Let me go as far as that. Marginally, things are looking better. The big quarter for that business is second and third quarter. That's when they do most of their origination because a lot of the origination happens to school districts. And when schools close for the summer, when the activity is the highest. So first quarter is generally pretty slow. So we will know now in the second and third quarter really how the market is shaking up to be. From the few deals that we have bid on, I would say at the end of last year, we were not just losing, we're losing big as there'll be 3 or 4 bidders ahead of us. Now it is not as bad. We are still not winning a lot, but the market seems to have rationalized somewhat. People have backed off, which is a nice place to be as we start to take lending season in second quarter and third quarter.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Singh for closing remarks.

Once again, thank you, everyone. We feel very good about where we are. We had a pretty good quarter, $0.65 per share compared to $0.54 of nonloss share earnings this time last year. That's, in my mind, that's phenomenal improvement. Deposits growth, loan growth, everything came in better than we were expecting, and the economy is holding up. We will continue to pray to the interest rate gods for a better curve. But other than that, we're feeling pretty good, and we're very excited about BankUnited 2.0, as we start implementing everything that we planned over the last 3, 4 months. With that, I, once again, thank you for joining us, and we'll talk to you in 3 months. Thanks. Bye.

Thanks, everybody.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.