BankUnited, Inc. (BKU) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the BankUnited, Inc. 2019 Fourth Quarter and Fiscal Year Earnings Conference Call. At this time, all participant lines are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference maybe recorded. [Operator Instructions] I’d now like to introduce your host for today’s call, Ms. Susan Greenfield, Corporate Secretary. Please go ahead.

Thank you, Liz. Good morning and thank you for joining us today on our fourth quarter and fiscal year 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.

Thank you, Susan. Welcome, everyone, to our earnings call. Thank you for dialing in, giving us your time. We’re coming to you from beautiful Miami with a beautiful day and it’s even more beautiful because of our earnings. We closed the year and the quarter on a very, very strong note. For the year 2019, net income came it at just a little over $313 million, that’s $3.13 per share. I think that makes this from an EPS perspective our highest EPS year, excluding the tax benefit that we got a few years ago. So, we’re very happy with the performance, remember this is just, this is our first-year without loss share and we’re hitting record EPS numbers, so we’re very happy about that. Let me do a quick comparison to the prior year. The prior year, our earnings was $325 million or so, an EPS of $2.99, that included loss share. So, even with the fact [that included loss] share getting to a $3.13 EPS from $2.99 in the year is about 5% growth. And if you were to actually just look at non-loss share earnings in 2018 and compare them to this year’s earnings, EPS grew I think about 33%. ROA came in at 95 basis points and ROE came in at 10.6%. For the quarter, we are reporting net income of $89.5 million or $0.91 per share. This is the time of the year when we give you guidance, which we will in a second, but before we talk about, we’re looking forward, let me just recap. I think our earnings release in first quarter of 2019 was also on the 23 of January. So, exactly a year ago, we said to you that we think loans will grow mid-single digits, deposits will grow mid-single digits. At that time, 2.0 efforts were not finalized, so we said earnings would grow low single digits. Later on, we said they would actually shrink – expenses and we gave you some guidance around margin, which was always the hardest thing to do, but we said, we’ll probably be in the [250 to 260] range. And I think, we never talk about EPS guidance, but you all obviously put out EPS targets. I think this time last year, your expectation collectively was about [mid-2.80s] I think, or so. I could be a little off on that number, but if you compare that to where we came out, I think loans grew by 5% in the year, deposits grew about 4%, non-interest grew 4%, 73% of the deposit growth was DDA, which we’re very, very proud of. And expenses actually shrank by 4.5% in large part to the efforts of BankUnited 2.0 and all of that solved to a $3.13 EPS, which is nicely better than what the expectation was 12 months ago. So, all in all, we’re very happy with how 2019 came out and we were even more happy and excited about where we think we will – we are headed in 2020. So, just a few quick more detailed numbers on this quarter and this year. The biggest news in the fourth quarter of 2019 was that deposit costs came down by 19 basis point from 1.67 in the third quarter to 1.48 in the fourth quarter. We had set the expectation at the last earnings call that you could expect a meaningful drop and here it is 19 basis points. Largely, through that we’ve been able to hold our NIM flat. I think the guidance we gave in third quarter earnings was that we may be down a couple of basis points, but we actually did a little bit and we came in flat at 2.41. Leslie will get into more details behind that. DDA growth for the fourth quarter, so we grew DDA by 168 million and total deposits grew by 438 million. For the year, DDA growth came in at 674 million and total deposit growth was 920 million. So, 73% of that 920 was DDA growth, which is, I think the thing that we’re most proud of. Loans for the quarter grew 300 million or so and for the year had 1.2 billion, so that’s about 5% growth rate for the year as I had said a few minutes ago, and Tom will get into more details around where that growth came in from and it was pretty widespread. Let me give you my take on credit. NPLs increased to 88 basis points from 60 basis points last quarter and that increase as we had talked at the last quarter was largely attributed to one loan in the C&I portfolio in the Florida region, and we’ve been working on that move taking the special provision for that loan this quarter. So, total NPAs increased by 67 million, 41 of that was that one particular loan. The rest is largely attributed to SBA loans that we put on non-accruals, which are guarantees. So, that’s about 13 million. So, between those two things that makes up our vast majority. Now, you will notice, while NPLs have gone up, our criticized and classified loans are actually down a couple of basis points. So, within that category what has happened is, stuff that was criticized and classified, but accruing last quarter we made these 67 million loans non-accruing. So, it’s moving from that bucket to the other. The overall bucket of loans that we keep a very close eye on actually went down by 2 basis points from [1.92 to 1.90]. Net charge-offs for the year came in at 5 basis points. This compares to 10 basis points or so previous year, excluding taxi, including taxi it was even higher, it was 28 basis points, but ex-taxi we were running about 10 basis points in 2018 and 5 basis points in 2019. So, progress over there. In terms of systemic risk in the portfolio, still we’re only seeing, the only place where we see systemic concerns are in the restaurant franchise finance space, which is about a 360 million or so size portfolio for us. That’s what we are keeping a very close eye on and other than that we don’t see any systemic issues on credit anywhere in the portfolio. Quickly talking about BankUnited 2.0, we are kind of half way at the half way point in terms of this two-year effort. We’re very happy with the progress that we’ve made. Like I said last quarter, I think on the cost side, we’re a little further ahead that what we thought we would be at, and at the revenue side, we’re a little further behind than where we thought. This is not in terms of numbers. Numbers we’re still very comfortable with what we gave you, which is about $60 million total benefit 40 of it costs and 20 of it in revenue. I’m referring to is the timing, so on the cost side, the timing came out better than we had expected and the revenue a little worse, but in terms of achieving both those numbers we’re still very confident that we will achieve them easily. In fact, the success that you see this year, if you just look at our expense line down 4.5% from last year, that – a lot of that goes to the progress that we’ve made in 2.0. Guidance quickly for next year. I would say, it’s very similar to what we gave you last year. Mid-single digits loan growth, mid-single digits deposit growth, our focus within deposits will continue to be DDA. 2019 was 674 million. The year before that was 550 million in DDA growth. I would love for the number to be even higher this year, but it’s a notoriously difficult number to predict, but we still think it will be similar to last year. On expenses, we think it will be flat this year. If you do nothing with the expenses, they tend to grow 3%, 4%, I think with what estimates will be done in 2.0 will help us keep expenses, basically about flat. Share buyback, we are under the $150 million buyback program. We did about 4 million of that this quarter and we will continue to educate on that opportunistically over the course of this quarter and from there on. With that, let me turn over to Tom. He’ll give you a little more color on the numbers.

Thanks, Raj. As Raj mentioned earlier, growth for the quarter from a loan portfolio perspective was 301 million with solid quarter force. We’re really happy to see that we had broad growth across really many of our key business lines within the company. Our C&I book grew by $130 million in commercial real estate. Excluding multi-family, we grew by $230 million for the quarter and had growth in both markets. Residential business grew by $90 million. We had just over $30 million of growth in the Bridge Funding Group. So, it was really a broad spread, nice quarter across all lines of business. So, we were happy to see that. Multi-family portfolio for the quarter, thought I’d comment on that just a little bit, remained relatively flat, we had 53 million of growth in Florida, which was offset by a decline of 57 million within the New York multi-family portfolio. For the year, the New York multi-family portfolio declined by just under $350 million, which was kind of in-line with our expectation. Mortgage warehouse business one of our newer faster growing businesses was actually down a bit seasonally. In Q4, it was down by $137 million, kind of reflective of normal seasonality and lighter utilization that we tend to see it that time in the quarter, but overall commitments continue to grow in that area. Looking ahead in 2020, we still continue to see obviously good overall economic conditions in the markets that we operate in. We’re seeing growth opportunities in our corporate and commercial banking lines in both Florida and New York, our specialty finance businesses. Florida commercial real estate lending, we continue to expect to see quality growth. Overall growth in the commercial real estate portfolio non-multifamily focused, expect good growth in the small business lending area, and continue growth in the residential portfolio. While there are certainly opportunities in the New York commercial real estate world, run off with a multi-family portfolio will likely continue to offset the overall growth in the New York real estate portfolio in 2020, as we have a fairly large group of maturities in 2020. So, we expect to see net run-off in that area. As Raj mentioned on the deposit side, also a similar story, good growth across virtually all of our major operating lines, which again is encouraging to see. $438 million of growth. 38% of that as Raj mentioned was a non-interest DDA, and we continue to invest substantial amounts of time and energy than effort in increasing treasury management business, fee-based business, and operating accounts across all of our business lines. So, overall from a loan and deposit quarter, I think a very solid quarter for us. So, with that I’ll turn it over to Leslie.

Okay. Thank you, Tom. Getting into a little bit more detail on some of the quarterly results. Talking first about yields in the net interest margin, net interest income was essentially flat quarter-over-quarter, but declined by $110 million, compared to the fourth quarter of the prior year. Obviously, as you all know that was primarily due to the $107 million reduction in interest income from the normal recovered loans. The NIM remains flat quarter-over-quarter at 241, down from 401 for the fourth quarter of 2018, again primarily due to the decline in those high-yielding covered loans. Those decreases were expected given the termination of the lost share agreement in the final portfolio of sale of covered loans towards the end of last year. The overall yields on loans is 4.27 this quarter, down from 4.43 for the immediately preceding quarter. The decline was mainly due to coupon resets on floating-rate loans and pay off of loans at higher rate in some the new originations coming on. Yield on loans for the fourth quarter of the prior year was 6.35, again, the decline attributable to the demise of the loss share portfolio. The carrying value, because I know you guys are going to ask me this, the current carrying value of formerly covered loans at December 31, that was, $158 million. The yield on those loans was 34.91 for the quarter and we expect the yield on those loans to be between 34% and 35% going forward and the balance to continue to decline at a fairly consistently rate and hopefully I’m talking about those for the last time. The yield on the investment portfolio was down to 3.18 for the fourth quarter of 2019, compared to 3.40 for the immediately preceding quarter and 3.59 for the fourth quarter of 2018. The decline was primarily due to coupon resets, lower reinvestment rates, and higher prepayment fees on securities owned at a premium that accounted for 6 basis points with a quarter-over-quarter decline this year. Duration of the portfolio remains low at 1.3. As Raj mentioned previously, the total cost of deposits was down 19 basis point linked-quarter to 1.48. The cost of interest-bearing deposits was 1.81 this quarter compared to 2.01 for the preceding quarter and compared to 1.80, so relatively flat to the fourth quarter of 2018. Non-interest-bearing demand deposits were 17.6% of ending deposits, and 16.7% of average deposits for the year, compared to just over 15% for the prior year. For the fourth quarter of 2019, average non-interest-bearing deposits were 18.1% of the average total deposits, so great progress there. First our NIM guidance, going forward is based on an assumption that there will be one Fed rate cut in back half of 2020. We do expect pressure on asset yields, both loans and securities, as, you know, coupon resets continue and asset come on at a little bit tighter spreads than some of the assets that are running off. However, we also expect the cost of deposit to continue to decline, particularly in the CD book, though there may be fewer catalysts for reducing deposit costs in 2020 if the Fed only cuts rates loan. On balance, I think as Raj said, we’re projecting the NIM for 2020 to be pretty much flat to the fourth quarter on 2019. Turning a little bit to the reserves and reserves in the provision, the provision for the quarter was actually lower than we initially expected in part because we had recovery this quarter of about $4.2 million that we were necessarily anticipating at the time of last quarter's call, and that partially offset the provisioning we did related to the $41 million commercial relationship that Raj mentioned. Within – buried in the provision, there is an increase of $10.5 million in specific reserves, but in addition to those recoveries, we had an offsetting reduction in reserves on the past portfolio as the historical loss ratios that drive that continue to come down. Talking for a moment to CECL, our current estimate of the initial adjustment to the reserve on adoption is an increase of $25 million to $30 million in the reserve. That will bring that to a ratio of somewhere between 58% and 61% of total loans, compared to the current 47 basis points, and we also expect a $5 million to $6 million increase in our reserve for unfunded commitments upon adoption. The CECL provision, I'll be honest with you, is pretty challenging to forecast because you find yourself trying to forecast a change in your economic forecast, which is pretty much impossible to do. So, it is a challenging thing to forecast, but we do, obviously, expect an increase in the level of provisioning in 2020 just due to providing for those lifetime losses versus incurred losses, and currently I would say we expect that CECL reserve to remain around that initial range of 58 basis points to 61 basis points throughout 2020. However, I emphasize that that can be volatile and it will be impacted by changes in things such as our economic forecast, forecasted prepayment fees and portfolio mix. That was my comments on CECL. I want to briefly comment on the securities gains that you saw this quarter. $5.7 million of those gains related to opportunistic sales of some securities we were still holding from way back, you know, the original acquisition of the failed bank in 2009. Most of those were related – rated – continued to be rated below investment grade and we just took the opportunity to kind of clean up that segment of the portfolio and that – the majority of the gain we recorded this quarter relate to. A little bit on expenses, non-interest expense for the year ended December 31 included $14.8 million of cost specifically related to BankUnited 2.0. For the fourth quarter, those costs were pretty insignificant, only about $300,000. As Raj alluded to, for the full-year of 2019, compared to 2018, you know, if you just do nothing and let things run, your expenses are going to go up, you know, 3% to 4% a year just as you give people their normal merit increases and what not. Because of the impact BankUnited 2.0, we do think those expenses, you know, will remain flat year-over-year in total. I would say that the one line item I think you will see some increase in that you’ll probably notice as we move through 2020 is the technology expense line as we start to see some of the impacts of some of the technology investments that we’ve been making begin to hit the P&L, and that’s in part the reason that we think those expenses in the aggregate will be flat next year instead of down. Income taxes, let me comment on that for a few minutes. Obviously, the ETR was very low this quarter at 14.4, all of that really was a result of the fact that we filed all our state returns in the fourth quarter and we fine-tuned all our portion of factors, and, you know, the estimates we had made around those portion of factors came down and we realized the benefit of that this quarter. We will continue to see that benefit reflected in the lower ETR going forward. I expect that ETR for next year to be between 22.5% and 23%, which is consistent with where we landed for the year for 2018. The other thing that happened is Florida actually reduced its corporate tax rate like on a percentage point in the fourth quarter, so that also gave us some benefit. With that, I’ll turn it back over to Raj for any closing remarks.

Yes, I think the only thing I would add, which I forgot is to just generally talk about the environment. Florida and New York, our primary markets, both continue to do extremely well. We don’t see signs of an aging business cycle. I know when we all look at our Bloomberg screens, at least as we were looking at them a couple of months ago, it was a different story, but on Main Street, we don’t see that and we’re happy for it. It’s something we don’t control, but obviously it impacts our numbers. So, as far as we can see, the view on Main Street is very good. With that, we will turn it over to you guys for Q&A.

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

Hi, thank you. Good morning, guys.

Good morning.

Good morning, Brady.

So, Raj, buybacks have really slowed. In the back half of 2019, we only repurchased, you know, not even half of 1% of the company. I mean that’s – if you look at the first half of the year, you repurchased 4% of company. Last year it was about or in 2018 it was about 8%. Is the buyback pretty much over or do you think in 2020 you'll step it back up and get more aggressive repurchasing stocks? I mean the stock is still relatively cheap 115 times tangible.

Yes, I mean, Brady, we don't – if you go back and see when the buyback was authorized, literally the day or, you know, when we were having those discussions in the board room, the stock was very low at that time or maybe just a day or two before that and we set, you know, sort of some parameters if we give to our brokers, and literally within a day or two, even before the buyback could technically start, stock started to go up and we kind of kept chasing that and never really caught it. So, good problem to have. We should – you know it’s an even better problem. But no, there’s no other magic to it. We don't sit here and try and predict. We don’t trade the stock or anything like that. We give directions once or twice a quarter and then we just let it be. So, we were just always a little – a couple of bucks behind and that’s why you don’t see as much of a buyback. We still love our stock as, you know, a great investment at where it is today and see more buyback going forward. There has been a lot of volatility in the marketplace, right. Last year, our stock was up and down a lot, I mean – and not for fundamental reasons, but just what the market is doing. So, we also saw Brexit coming in December and we thought that would create a lot of noise, and you know, be an opportunity, so for us to buy stock back cheap, but, you know, it never happened. You know, like I said, I’m happy with that, but it obviously reduces the buyback, but, you know, we’ll continue to buy back. This is a not a discontinuation of the buyback strategy. We will do this buyback and then when it’s done, we’ll go back to the Board and we’ll look at our capital position again. One thing that I also forgot to mention, let me just say that out is at the February Board meeting, we are going to look at our dividend policy as well. So, what comes off of it will be published only when that meeting happens, but that is on the agenda for the February Board meeting. Our dividend has been at $0.21 a quarter for a very long time, and the Board is going to look at it in February.

Then the other thing I would add to that, Brady, is that, you know, we haven’t changed anything about the capital targets that we disclosed to you in the past.

Alright, that’s helpful. And then, on the $41 billion Florida C&I credit, I remember you all mentioning that briefly last quarter, any other color as far as, I mean, you know, what is happening with that credit? And then, I know you said that you took a provision on it in the fourth quarter, what’s the mark on that loan as of now?

Alright. It’s about – it’s a little less than $10 million is the provision that we’ve taken and we feel very comfortable with that number. It took us all of the quarter to fine-tune the number and come up with what we think is a very safe number. It’s going to be in work out for a while. The situation is not one of, you know, liquidation and bankruptcy kind of thing where, you know, we can say three or four months we’ll liquidate everything, so it's an ongoing concern, and so this loan will be in work out for a while, but we think we’re adequately reserved with this $9.5 million that we’ve just taken.

Right. And my CAO sitting here, so if he hits me, I’ll retract what I am about to say, but I think under CECL, the reserve for that loan is going to be unchanged. We feel like that’s an appropriate [indiscernible]. He didn’t hit me.

And then finally for me, you know, Raj, you mentioned last quarter about hiring a couple – maybe a team or two in Atlanta on the commercial front, any update on kind of how you’re thinking about Atlanta and the investment you’re going to make there?

Yes, so the team is here. They are off to the races. I would say that, you know, these are seeds we are sowing in a new market. It’s not going to have an impact that will drive your investment analysis over the next 12 months, but these are seeds we sow for three and four years later and it actually works, but we think it will be material in three or four years down the road, but not in the next year or two. So, we’re happy with the team, with the progress that they’ve made in the very first few weeks. They have a decent pipeline, and – but I think the numbers will be small early on.

Got it. Thanks for the color guys.

Yes.

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

Good morning.

Good morning.

Good morning, Ebrahim.

Just one quick clarification, Leslie, on the expense side. When we think about flat expenses, just want to make sure we’re looking at the right numbers. It's about $420 million adjusted for BKU 2.0 and the amortization and the depreciation expense, so is $420 million the right way to think about it? And then…

That sounds right. But, yes, it’s just the total minus the [14.8 and BKU 2.0] cost, and then, to your point, the depreciation of our operating lease equipment, which will fluctuate with the portfolio.

And is there much in 2.0 costs remaining that we should expect in 2020?

The only thing I think a significance that you’ll see going forward maybe some costs associated with some of the branch closures and as we incur those, if they are significant, we’ll disclose them, but there will be some of that and probably some technology investments that we’ll be making in some of the platforms that we’re putting in place to generate the revenue, so those will be the two categories where I think you’ll see something going forward.

Got it. And if we took a step back, and Raj, if we look at BKU 2.0 and what it’s accomplished looking out into 2020, beyond 2020, like if you could just talk to like what it has done, means we see the obvious decline in or keeping the expensive flat or the savings, but beyond that on the expense/efficiency side, how has that changed the BankUnited and how should that impact like as we think about a more medium term outlook for the company?

I mean, I could talk about that at [indiscernible], and you know, I have here bullet points in front of me, which Leslie prepared, I don’t want to get into that level of detail, because there is no one particular thing that I could just point out. It’s branch optimization, it’s organizational optimization, it’s changing some of the current process. It’s the digital bank investments that we’ve made. There’s a lot of little things. It’s robotic process automation, you know, we have 30 bots in production now and many more to go in. All of these buy themselves, any one thing is not as exciting to talk about, but when you put it all together, it adds up to, you know, $40 million of expenses and $20 million of revenue, but it is really about changing out or retooling the plumbing of the company so that it remains nimble and efficient as we get to the next phase of growth. So, we've not done this major retooling in 10 years and 10 years ago, we were a $10 billion, $15 billion bank and toady we are $35 billion. So, this kind of major retooling is needed for companies that grow as fast as we’ve grown. I think in 10 years’ time, if we’re a 60, 70 whatever billion-dollar company; it’ll probably be needed again because we will have grown what we are doing today in terms of processes and organizational design and so on. So, you know, I’m happy to talk to you in a lot more detail if you want to call me, but it really isn’t one thing that I can, you know, point to. Maybe the organizational design would be the biggest thing – biggest change…

And some of the technologies.

Yes, the technology investments, yes.

That’s fine; I’ll circle back offline. And the other point just around the technology investments, if you – I wonder if you can provide any color around is this just upgrading core systems? Is there anything client facing revenue driven kind of investments that you’re undertaking that should show up may be later this year or next year?

So, I would say the two big buckets are, you know, we’re moving the bank completely to the cloud and we are more than half way through that journey. That journey will be complete by the end of this year. So, that’s one big thing, which we started. Honestly that was not even part of 2.0. We started doing that before 2.0 and that is coming to ahead and that has – that improves the infrastructure of the bank in many ways. It’s not just about cost; it’s also about making the infrastructure much more robust. There are big investments that are happening in the digital space as well on customer facing technology, which also start to go live with clients. I think this quarter is an employee roll-out, and then starting next quarter will be bigger roll-out for the rest of the franchise. There are investments also being made on the commercial payment side. We’re early in that. That’s project has kicked off this year and will take a couple of years. There is a lot of investment that is going in. It’s difficult for me to just say okay, this effort leads to this many dollars in revenue, but all these investments we’re making, you know, are eventually not because we just like the technology, but because we like more revenue. So, they are all driven to our assumption that revenue, some of that will pan out in the next year and some will take three or four years, but are big numbers.

They’re also all very impactful on the deposit side of the business, yes.

Oh! Yes. Probably more so on the lending side.

Right, on the lending side of the business, yes, yes.

Yes, it’s not – you’ve not heard the word loan origination system. All of these investments whether it’s commercial payments, whether it is digital and our infrastructure of the cloud, they are all geared more towards deposits and loans.

Got it. Alright, I look forward to seeing the BKU ad in the Super Bowl. That’s for taking my questions.

We are doing some [indiscernible] marketing on that front as well by the way. If you want to look for it, that’s more going to be on social media.

Our next question comes from the line of Dave Bishop with D.A. Davidson. Your line is now open.

Yes, good morning.

Good morning.

Good morning, Dave.

A question circling back in terms of the BKU 2.0, Raj, you said there is a little bit…

We have a little trouble hearing you.

Yes, you said that there is a little bit of a delay on the revenue side in terms of the BKU 2.0, just curious in terms of the timing, you still think that’s achieved by 2021 and just remind us in terms of some of the products, the new systems and products that are going to ramp up the revenue side?

Yes. So, the revenue bucket was, again, made up of a number of things that added up to about $20 million. Anything that had to do with existing products and existing platforms that we’re already on, that we are on track and probably a little bit ahead of being on track. Anything that falls into the category of whether we have developed or new product or new technology or had to hire new people with product expertise, that has taken maybe a quarter longer than what we thought. So, step we thought we were going to launch in the second quarter of this year is now pushed after third quarter. So, you know, that’s the delay, so it's about, you know, three or four months worth of delay. But on the expense side, I’ll tell you that we are three or four months ahead of where we thought we were, and the expense will be twice as big as the revenue will be. So, overall for the program, I feel we’re a little bit ahead, but if we just break it down between revenue and expenses that’s where we are. The new products, to your question, you know, a commercial card program that we are going to launch, that is on a three-month delay. We talked we would launch it in April, but it is going to be more in August. That team – it took a while to hire the right team. It took – [obviously] a little bit longer for negotiating with vendors and do the IT build out, so that’s where we are. We’re also making changes to small ticket underwriting, call it – I won’t call it a new product, but it is certainly a new process ad we’re automating that and that is also on a three or four-month delay. We talked we would launch it, you know, early this year, it will probably happen in late in the summer. So, it’s things like that where we have to develop new things or hire new people or launch new products, it ended up taking maybe three or four months more.

Got it. And then, maybe a quick update in terms of what you’re seeing in that franchise finance portfolio on the [rail car] portfolio?

The franchise – you just said rail car or franchise?

Both…

I think the question is on for the restaurant franchise.

Correct.

Okay. So, let me first talk about – our franchise businesses give or take about $600 million, of which the restaurant piece is about two-thirds of the business. So, let’s say about $360 million or so. The non-restaurant, which is the rest, which is things like…

Fitness.

…fitness and, you know, and other concepts are doing extremely well. So, we’re not concerned about that. We’re happy to likely to grow that part of the business. Restaurant, which is about 360 million is under stress for a number of reasons. One is got to do with the unemployment rate being where it is. It’s putting a lot of pressure on labor cost. Two, I think changes in customer behavior driven mostly because of Uber Eats and Grubhub and DoorDash and so on, customer behavior is changing in terms of, you know, rather coming into a restaurant is a low delivery happening. And when delivery happens, often the revenue model gets impacted because you're not ordering some of the higher priced stuff or higher margins stuff like drinks and desserts. So, that’s putting pressure on. And then, you know, I can go on. When we talk about pizza, that used to be the primary delivery product and now that product is going challenge. Now everything is available [indiscernible]. And so, just the pizza concept is under pressure from new competition. They only have to worry about the Chinese food delivery, but now they have to worry about everything from Starbucks to McDonald's and Wendy's and Panera, everybody delivers. So, that change that is happening in the business model coupled with tight labor market is what is putting pressure on the financials of our, you know, borrowers.

I would add that some of these clients are, you know, moving towards more automated methods. We happen to see one the other day where you’re instead of having labor produce a pizza, you have now pizza machine manufacturing. So, the franchisees are working to adjust to new labor markets and new cost markets, but it's just going to time and there are pressure on margins while this is happening in the business, so it’s an area on the food restaurant side of our franchise business where we’re just trying to be more cautious at this point.

Got it. And is that – any of that are non-performing or [indiscernible] classified?

Any what? I’m sorry.

Any of those loans have been classified.

Yes.

There are some, yes. I don’t have the exact number in front of me, but it will be disclosed in the 10-K and was disclosed in the last Q, but there are some for sure.

Got it. One final question, the $1.9 million impairment charge…

Yes.

I think you provided in the press release, maybe color on that?

Yes, we had some equipment under lease. It’s exiting back off lease and when we reevaluate it, the residual value and the market value of that equipment, it wasn't railcar, and it was other equipment in the portfolio. Interestingly enough, we found that, you know, the current market value of that equipment was a little lower than our residual. I don't think that’s systemic. I don't expect that to be pervasive throughout the portfolio and like I said, it wasn’t even railcar, it was another form of equipment.

Got it. Thanks for the color.

Our next question comes from the line of Tyler Stafford with Stephens. Your line is now open.

Hi, good morning guys, and thanks for taking the question.

Good morning.

I just wanted to fall back up on expenses. I appreciate the outlook for 2020 with expenses to be flat given the offsetting nature of the 2.0, but otherwise expense growth, as you mentioned, would have been at 3% to 4%, so just to confirm, you know, the expense reduction benefits of 2.0, will those be fully complete by the end of 2020? And then, as we think about 2021, there would not be any lingering 2.0 savings, is that the right way to think about it?

There might be a little bit related to branch optimization, Tyler, that’s still – is happening after 2020, but the bulk of that would certainly be done.

Okay. And then, just following up on one of the prior questions that I don't think got asked was just around the railcar lease portfolio, so last week Wells called out an elevated charge-offs out of that portfolio. I think it's around $200 million or so for BKU. Just curious if you comment on what you're seeing trends wise out of that portfolio?

I mean, we haven’t – obviously we haven’t taken any other impairment charges as of – as I just explained. But when we took this quarter, it was not in the railcar portfolio, so – and we’ve done a very thorough reappraisal and reevaluation of all those values in the fourth quarter and did not have any additional impairment charges to take. I would say, you know, $235 million is what we have in railcar at December 31, sitting on the balance sheet, and you know, we continue to monitor it and the appraised values are coming in.

Yes, we took deep, deep look at it in Q4 and we’re satisfied with the results.

Okay. Alright, great. That’s it for me, thanks.

Thanks.

Our next question comes from the line of Steven Tu Duong with RBC Capital Markets. Your line is now open.

Hi, good morning guys.

Good morning.

Good morning.

Good morning. On your New York City multi-family, do you expect it to perform similarly to what we saw this quarter essentially offset your Florida multi-family for the year?

No, I would not say so. I would say the maturity level in Q4 in New York for that portfolio was relatively light. It will be larger in 2020 and it will be larger in the first quarter of 2020. So that level of maturity was a bit of an aberration in Q4 2019.

Got it. Alright. Appreciate that. And then on your warehouse lending business, you guys had solid growth this year. If the industry originations, let's say, declines by 10%, do you still think you can keep this book where it is or possibly grow it?

We have a pretty decent pipeline, so our expectation is we’ll continue to grow commitments. Utilization will obviously fluctuate based on the time of the year, but also based on what happens with the mortgage market in general. So, third quarter was amazing. Fourth quarter has slowed, but more out of seasonality than anything else. First quarter will slow even more. Generally, we bottom out in February and then start to build balances up or utilization up again in March, and then, it’s really in the second and third quarter where we – utilization gets up of over 50%. But in terms of – you know, I don’t look at the outstanding in that business as much as I look at commitments. The commitments are continuing to grow and the pipeline is decent. So, we’re not concerned about growth in that business.

I would add that when volume is down, you tend to see clients cater back, you know credit players that are less significant in their world and I think when we look at our relationships and the commitment levels that we have in the relationships we’re well-positioned in our major relationships.

Just curious on that, how much have commitments changed in the fourth quarter this year versus a year ago?

I don’t have a year ago numbers.

Give us a minute. Somebody is looking right now.

Sure.

We’ll interject that when we find it.

Okay. Yes. And then just moving on to your resi book. Did you guys have any of those buyout loans this quarter?

Yes. More than 100% of the growth in resi that you see was from those loans.

Okay. And can you remind us. The current interest rate environment remains attractive for these loans is that correct?

Yes, correct.

Yes. Absolutely.

Okay, great. And then just my, one last question, just going back to, you know you talked about branch closures, have you narrowed down what you are looking to do in terms of branches where you are looking to close one, maybe open in another area, or is that still a work in progress?

No, for – all the branch optimization decisions have been made, but the implementation of those decisions is a two-year process. So, some we have already acted on in 2019 and some we are going to act on in 2020, but all the decisions have already been made.

Steven back to your question about mortgage warehouse commitments. They are just a little shy of $300 million year-over-year.

Great. Awesome. Really appreciate. Thanks for the color.

Our next question comes from Sean Tobin with Janney. Your line is now open.

Good morning.

Good morning.

Good morning, Sean.

Just one clarification question on the margin. You said that it is basically flat with – 2020 margin will be flat with the fourth quarter of 2019 and is that including one rate cut?

Including, yes.

Okay. That’s helpful. And then just one other interest rate related question, do [loan floors] are they possible for you to get done today, is that something you are looking at all for 2020 within your commercial contracts?

Yes. We are actively working on LIBOR based floors. I wouldn’t say we are successful 100% of the time, but we’re successful a fair amount of the time in instituting a floating rate LIBOR floors.

Okay. That’s helpful. That’s all I had. Thanks for taking my questions.

I’m showing no further questions in queue at this time. I’d like to turn the call back to Mr. Singh for closing remarks.

Thank you for joining us. We’re very happy with the progress that we’ve made in 2019. We’re happy where the number came up. I think we’re most happy that deposits continue to grow and the quality of the deposit continues to improve. 19 basis points reduction in cost of funds last [indiscernible] I think was the industry leading number from at least from the reports that I’ve read so far. So, we’re happy about all that and we’re optimistic as we get into 2020. We’ll talk to you again in three months. Thanks, bye.

Ladies and gentlemen. This concludes today’s conference call. Thank you for participating. You may now disconnect.