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BankUnited, Inc. (NYSE:BKU)

Q1 2013 Results Earnings Call

April 24, 2013 9:00 AM ET

Executives

Mary Harris - Senior Vice President, Marketing and Public Relations

John Kanas - Chairman, President and CEO

Raj Singh - Chief Operating Officer

Leslie Lunak - Chief Financial Officer

John Bohlsen - Vice Chairman and Chief Lending Officer

Analysts

Rob Placet - Deutsche Bank

Brady Gailey - KBW

Matthew Clark - Credit Suisse

Herman Chan - Wells Fargo Securities

Gerard Cassidy - RBC

Joe Fenech - Sandler O'Neill

Operator

Welcome to the BankUnited 2013 First Quarter Earnings Call. My name is John, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mary Harris, Senior Vice President of Marketing and Public Relations.

Mary Harris

Good morning and welcome. It’s my pleasure to introduce our Chairman, President and Chief Executive Officer, John Kanas.

But first I’d like to remind everyone that this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company’s current views with respect to, among other things, future events and financial performance.

The company generally identifies forward-looking statements by terminology such as outlook, believes, expects, potential, continues, may, will, could, should, seeks, approximately, predicts, intends, plans, estimates, anticipates, or the negative version of those words or other comparable words.

Any forward-looking statements contained in this call are based on the historical performance of the company and its subsidiaries or on the company’s current plans, estimates and expectations.

The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates or expectations contemplated by the company will be achieved.

Such forward-looking statements are subject to various risks and uncertainties, and assumptions relating to the company’s operations, financial results, financial condition, business prospects, growth strategy, and liquidity. If one or more of these or other risks or uncertainties materializes, or if the company’s underlying assumptions prove to be incorrect, the company’s actual results may vary materially from those indicated in these statements. These factors should not be construed as exhaustive.

The company does not undertake any obligation to publicly update or review any forward-looking statement whether as a result of new information, future developments or otherwise.

A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company’s annual report on Form 10-K for the year ended December 31, 2012, or at the SEC’s website, www.sec.gov.

I’ll hand the call over to John. John?

John Kanas

Good morning, everybody. Raj Singh is here with me; Leslie Lunak is here, our newly appointed CFO; and John Bohlsen is with us, not invited but in voice from New York.

We obviously very pleased with the quarter. $0.47 is a decent beat to the estimates which have been moving around recently, but generally $0.44, $0.45. And personally its even more gratifying because the while we opened four new banking centers in New York and have continued to add to staff in New York, so this quarter contains virtually zero in revenues from the New York operation, but pretty well loaded with upfront and ongoing expenses.

Also we had to deal with the large loan, it got a great deal publicity down here in Florida core Universal Health Services, which we had $15 or $16, I guess we have $16 million piece, we charged it’s a massive fraud, it’s been over papers down here, the FBI is involve and their expectations of people getting, people going to jail over this. It’s a multi-bank credit, where we had $16 million, we took almost $7 million in charge-off and reserve to be cautious another $5.5 give or take. And so the only thing remaining on our balance is what represented by basically cash.

I think we’ve been conservative over there. We hope to get some of that reserve charge back, but we’ve took advantage of this quarter to put this issue behind this. We are pretty well flushed out in terms of teams of people in New York. We are probably 50 or 60 people in chairs and then another 10 or 15 people who will be joining us strategically over the balance of this quarter.

Significantly the Herald Bank deal a little small, it didn’t involve a full blown data conversation and that has been successfully completed in March. So Herald Bank is no more, its part of BankUnited and it is completed converted under the BankUnited system.

Loan growth, you see if you add together loan growth plus the equipment under operating lease growth for the quarter, a little over $400 million first quarter typically relatively low growth quarter was last year and we expected on a comparison basis, it will be this year as well.

Deposit at $8.7 billion up a little bit. Remember that there is not a big push deposits in this institution, loan to deposit ratio is still hovering around 65%. So we’ve got lots of room to add there when necessary.

Margin came in almost exactly where we expected to commence like compression from the prior quarter at $593 and look the message that we bring to you is not unlike the message that you are getting from almost every other mid size bank in the country that is margin compression, margin compression.

And so the difference at BankUnited is that we are seeing a significant amount of asset growth which is helping, but certainly not enough to mitigate the inevitable compression of margin overtime as long as the government continues to keep the lid on interest rates which frankly we think will go on for longer than many people believe.

We think that we had a good look now at what could be expected out of New York. I’ll remind you that what we said was that we’re in operation for two full quarters in New York that we would expect loan growth out of those four locations to approximate the amount of loan growth is coming out of the 100 branches in Florida.

I will tell you that we do not believe that but certainly we can verify that statement. We think it’s probably -- it’s probably conservative. We think -- I expect loan growth in this quarter, loan in New York to be over $200 million and frankly having just spoken to loan guys 15 minutes or 20 minutes ago.

We think that that’s very conservative. So you will start to see tangible evidence of the growth of this franchise in New York by the end of this quarter without fail. Deposit growth in the second quarter, $150 million, $200 million probably $300 million, $400 million by the end of this year. Ultimately, once New York is up and running, we think that it will be somewhere between 75% and 90% funded by the New York deposits themselves.

Earnings at $48.2 million, net interest income slightly compressed, operating expenses increasing on trend as with everyone else. This environment is hostile for banks. It continues to put pressure on us and every other bank. It makes loans. It takes deposits. I expect that until New York kicks in fully that this will continue to put pressure on our margin as well.

The prospects for growth of loan assets in Florida and New York are stronger than ever. The South Florida market continues to amaze. We took a bunch of folks yesterday over to the west coast of Florida and entertained 100 or 150 clients last night and actually are beginning to start to see some signs of life in the west coast as well, nothing compared to what’s going on in Miami.

Indeed but certainly tangible evidences, stabilization in that market and significant evidence of the beginnings of growth, particularly we were in sort of the Naples, Bonita area last night that people are very encouraged by what they see going on. The other thing that we accomplished in this quarter, we did that a lot secondary offering of about 22.5 million shares, had the impact of taking the private equity guys down to below 9%, 8.5%-ish from their level of 14-ish.

So we made some headway with our relationship with regulators as a result of that and also as we chip away at their location. We tease the concerns that some people have had about this company over the years that these guys are certainly going to hit the silk and sell the stock. That is certainly nothing, something we don’t worry about it at all here. We are all committed to the growth of this company and reducing their share of ownership and organized its restructured way over the next couple of years.

I think book tangible -- book value tangible woke up again $18.35 and $17.66 respectively as of the quarter. And of course, the deposits continuing to come down 70 basis points versus the first quarter like 73 or 74 basis points. So chipping away at the funding cost, struggling and hanging on by fingernails like every other bank and trying to protect margins and trying to grow.

We think that took sort of preempted questions. There is as much competition in New York as there is in Florida and probably as much in Los Angeles as well if we were there. So banks are getting more and more competitive. We’re seeing some irrational pricing of loans.

We are running into it everywhere. We are backing away from those situations where we see people going out on the fixed rate curve at rates that we think are dangerous at these levels. So while we will -- while we’re committed to this growth, we’re also committed to discipline with regard to pricing overtime.

So I think I’m exhausted what I have had to say to you. For the moment, before answering your questions, Leslie over you.

Leslie Lunak

Okay. I’ll give a brief overview of earnings for the quarter, some of the factors driving earnings for the quarter and then take your questions. As John said, we ended the quarter with a net interest margin of $5.93. We do expect that to continue to compress as covered loans that are higher yielding continue to be replaced by new loan growth.

So we are still pretty consistent with our prior guidance, where we see that coming down to around $5.25 or so by the -- for the year on a year-to-date basis. We did sell loans in the first quarter. We told you that we were probably going to start doing those loan sales quarterly instead of annually.

We did sell loans in the first quarter this year that had some impact on our margins about $10 million ran through the margin related to the loan sale. Net impact on non-interest income was negligible. We expect that to continue and experience similar results for each of the next three quarters.

While margin is coming down, I do want to emphasize that net interest income due to loan growth is holding steady and we expect that to continue for the remaining quarters of this year. We expect loan growth to outpace margin decline or make up for at least margin decline so that net interest income holds steady.

The provision for the quarter as John says reflects the charge-off related to the Universal Health Care loans. Also buried in there is some benefit from release of reserves on our new bank residential portfolio as a result of loss factors relating to that portfolio coming down. So you’ve got a little bit of positive offsetting that negative which is maybe why that number wasn’t quite as big as some of you might have expected to see.

Now, they’re saying that we’ve talked about in the past that we see happening this quarter. The rate of the accretion on the indemnification asset has gone negative. We’re now actually amortizing rather than accreting that asset. We had predicted that that was going to happen. And in fact, it has happened as predicted you see that.

Something that’s got a lot of press this quarter from some other banks whether this new accounting standard is going to impact our accounting for that asset. The answer is no. Our previously existing accounting policies were completely consistent with the new standard.

They have been impressed about that related to other banks that have no impact on us. Again as John said, we do expect our operating expenses to go up the next three quarters of this year. I think the run rate will go up by about $6 million a quarter based on our current estimates. And most of that is New York. Some of that’s regulatory compliance cost, most of that’s New York. So you can expect to see that as we move forward. You should see that hit next quarter. Then it should pretty much stabilize after that.

John Kanas

I only wanted to comment before we start questions. Raj is here to answer any questions that you might have in his domain here, so is John. But we might be the only bank in the United States just not talk about reducing expenses. And it’s really not something that we have -- it’s not a lever that we have chosen to pull because of the growth trajectory of this company.

We continue to believe that that growth is embedded in this company and will turn out to be, I think probably conservative estimates of growth over the next two years. So we -- while we are not spending lavishly and we’re being careful on the growth on expense line. There is certainly a room there if growth should slow down in the coming years. We would start looking at that line but we are not pulling that lever now and don’t expect to be pulling that lever over the next couple of years.

We are thrill by the economic rebounds in both of our markets. Manhattan, as many of you know, Manhattan is booming at the moment. John and I had lunch the other day with some of the biggest real estate owners and developers, and the numbers that are coming out of market are just staggering.

New York by our measurement is becoming more and more of an international city. We are seeing prices of the residential condominium units in New York, not speculative, but close deals. Sales would go far beyond what any of us ever expected to see ever and certainly not at this time. We are seeing new constructions floating in Miami-Dade. Couple of towers going up one prick of Avenue and unlike the growth spud that Miami experienced seven or eight years ago, this one is fueled by real sales and not speculative construction.

It's not possible down here, as you can imagine to fund speculative condominium development. So the money that’s going into these new projects is fueled for the most part by contracts of sales, so we are through. We are right in the middle of, I believe two of the strongest markets on the East Coast and expect to continue enjoy that for the foreseeable future. And that was sort of enough for us to talk about and I would be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from Rob Placet from Deutsche Bank. Please go ahead.

Rob Placet - Deutsche Bank

Thanks. Good morning. First question, as it relates to growth in commercial loans. You obviously continue to see good growth but the pace declined in 1Q. I was curious if you could just talk to, what drove this? I would assume there is some seasonality and maybe some general lumpiness in there or was there something more specific? And then just an update on your outlook for loan growth down in Florida, should we just kind of -- is there upside to the pace that you’ve been running out in the past few quarters?

John Kanas

Yeah, Rob. As I said earlier that the first quarter is traditionally a slightly slower growth quarter for us down here in Florida. Some of that is driven by market activity. Some is driven by the sheer volume of loans that we were putting through underwriting and so well, we're anxious to show you these impressive growth numbers. We are more anxious to make sure that we are putting the right assets on the books.

So a fair amount of loans that we would hope to close in the first quarter got pushed over into the second quarter because of the care that we take in putting them through an arduous underwriting process. So there's -- certainly by no means do we expect to see loan growth slow in this market down South. And whether it actually increases from here remains to be seen. The evidence would imply that loan growth will be even greater in Florida this coming year, but it's a little early to make those prognostications. Certainly comfortable with a continued pace that we’ve seen.

Rob Placet - Deutsche Bank

Okay. And then in terms of competition, obviously things remain very competitive but just incremental to last quarter, how much has competition picked up?

John Kanas

Well, in Florida, not much. We saw -- I think you heard me say this before. Competition started to build probably in the middle of last year, when some of the institutions in Florida regained their help and we haven’t seen much of a change. There is actually a fairly decent amount of market discipline down here.

We are competing, whether couple of hundred small banks. Those small banks are not really in a position to grow, so the competition to loan growth is coming out of the large regionals down here in Florida. And they are for the most part, disciplined market competitors. And so we’ve really not seen much.

New York is a little bit of a different story. We are seeing some crazy things happening in New York. There are couple of competitors in New York that are breaking 3% on loans and this is not and by the way this is not the trend. But there are few new participants in the New York market that we think are going overboard in their pricing, in their credit standards. We are not going to play that game.

It will have no impact on our growth trajectory in New York, at least the market, so big remembrance. Manhattan alone is twice the size of the whole state of Florida. So, I would say that, owing to a couple of recent competitors in New York, we’ve probably seen a little bit of an uptick in competition, but frankly not in the kind of loans that we would be out there making anyway.

Rob Placet - Deutsche Bank

Okay. Thanks very much.

Operator

Our next question is from Brady Gailey from KBW.

Brady Gailey - KBW

Hey, good morning. This is a follow-up on that last question. The new participants in New York that are doing crazy stuff, is that some of the larger national banks or is that more banks that are competing on the community bank level?

John Kanas

It is not coming from the larger national banks. It's coming from completely new participants and also from some institutions that have turned their attention recently to commercial loans and commercial real estate loans, sort of as a new venture for them. And they are sitting in a low watermark in terms of pricing, but I frankly don't expect that to continue.

Brady Gailey - KBW

Okay. And then, John, I was curious to get your thoughts on consolidation. I know you still have City National down there in Miami and now you officially have all of handfuls off in New York. Can you just give us an update on how you're thinking about buying other bank?

John Kanas

Yeah. We continue to -- Raj and his whole team continued to work hard. Looking at the number of transactions simultaneously, we are in -- careful when I say this. We are increasingly optimistic that more opportunities will come around soon. But to be frank, this is an industry whose earnings are under pressure and by our measure, the banks that we look at are -- many of them are still being overly optimistic about -- when you look at a bank whose suggesting that interest rates are going to start to increase this summer and going forward and that’s the underlying tenants of their earnings projections. So next couple of years, you sort of scratch your head and say that’s unlikely to happen.

So we think that there's still some realism that needs to get into this market with regard and transfer itself into price. But there are many, many more conversations going on now than we saw a year ago. I think that something that you all need to focus on and I’ve been saying this for sometime and that is the regulatory involvement with regard to M&A. And I would point you to Bob to M&T, where nobody was looking for an announcement like that out of the blue, frankly from the fed that held up.

Arguably, rumors runs in my view one of best bank franchises in the United States that was taking over, what I view is very weak in franchise, should be something that regulators would applaud and stand up and try to approve on the spot and yet after a prolonged period of application eventually, eventually pour it called water on that and God knows how long. So I think you have to be careful and you should be aware that regulators are very much involved in the process of consolidation in this industry and in some cases are using -- are using that to further tighten the regulatory grip on institutions, could end that.

Brady Gailey - KBW

All right, great. Thanks for the colour.

Operator

Our next question is from Ken Zerbe - Morgan Stanley. Please go ahead.

Unidentified Analyst

Good morning, everyone. This is actually [Mark] stepping in for Ken. I had a quick question to clarify. You said that you would expect the income from resolution of covered assets to sort of stay at the level where you've seen it in the quarter. Should we expect that for the loan sales that you continue to execute on over the coming quarters that they will exclusively come out of that pool that you carry at zero book value or should it be more of a mix like you have in prior years?

Leslie Lunak

Hey Mark. So I think either may be I misspoke. Setting the loan sale aside income from resolution of covered assets probably will continue to comprise of smaller and smaller portion of our earnings each quarter. That's a trend that we expect to continue. There is a lot of lumpiness in that income stream and unexpected events can occur, but we are projecting that to come down.

The loan sale I would expect similar results to what we had in the first quarter, provided pricing hold, may be a little less if we get a little bit less in the way of pricing. We are not selling only loans from the zero carrying value pool. It’s just that net of indemnification the sale of loans from the other pool have minimal impact on earnings this quarter and we would expect that to be the same in the future. So it’s not that they are not being sold, it's just that it doesn’t have much of an impact.

Unidentified Analyst

Got you. Thanks, and then may be one thing to follow-up on the C&I question, you had a pretty significant drop in the C&I growth rate in the quarter, does that -- is that entirely due to what you’ve alluded to before seasonality and factors like that, that doesn’t make you feel any less comfortable with your loan growth guidance for the full year.

John Kanas

Yes, that is mostly seasonal and has to do with sort of the mechanical process of underwriting loans and getting them on the books.

Unidentified Analyst

Okay. Thank you very much.

John Bohlsen

As well as commitments and outstandings John.

Unidentified Analyst

Got it, exactly.

John Kanas

And which all points drew north frankly in Florida.

Operator

Our next question is from Matthew Clark from Credit Suisse.

Matthew Clark - Credit Suisse

Yes. Good morning. On the pricing in New York, can you just give us a sense for what you are putting on the books in new rate, you put it on the books I think your overall yield on new loans is $403 million, I think you talked about last quarter new rates coming, new loans coming on around 3.5%, just curious on what you are seeing in terms of actual pricing on multi tenant and commercial real estate and the types of terms you are willing to do and not willing to do?

John Kanas

That by the way in pricing in those categories. Multi families seems to be the most crowded category right now. Everybody is flowing all over themselves. We are seeing people -- actually we are seeing people break the rate, actually we are seeing people commit to $275, which we think is crazy pricing, but John I mean I am thinking that three is right mostly in New York.

John Bohlsen

I would closer to $375 right now. I am just looking at the list and I would say the average is about $375 and we are going out to most of this stuff is three to five years. We haven’t really started something much deeper than that.

John Kanas

Yes. So whenever our loan generation in New York will be a mixed bag with not with the major component of multifamily although it will be a significant -- we will eventually be significant players in multifamily. Right now that's very crowded.

Matthew Clark - Credit Suisse

Okay. And the growth that you offered up for the upcoming quarter in New York of $200 plus million, I guess is that excluding any residential purchases you might do in the trust area.

John Kanas

Yes. Yes.

Matthew Clark - Credit Suisse

And I guess...

John Kanas

That's New York and that's not -- there is no residential purchases in that number and by the way as I sit here I am watching John on a teleprompter in New York and he is pointing his thumps up on that $200 million number because John is actually closer to that. I think as John probably John you would say that's on the customer.

John Bohlsen

Yes I mean, I am very enthusiastic about the growth here in New York right now. We've put a lot of -- I am just looking at the pipeline and see we've closed already, we are in great shape for this quarter.

Matthew Clark - Credit Suisse

Okay. And then lastly any update on when we might see a trough earnings?

Leslie Lunak

We might see what? I am sorry.

John Kanas

Trough through the bottom I think.

Leslie Lunak

You know, I think we are going to see that into this year, yes.

John Kanas

I think I pushed out slightly from where we originally thought it would be by a number of things, one was the change in pricing that we got on some of the loans that we were selling and also the fact that we were a little bit beyond -- we were a little bit beyond in getting going in New York because of litigation matters that we had to deal with, but that's now behind us and we invite you by the way, those are guys that are in New York to step by and take a look at what we build.

We've build banking centres in New York City not really branches, 48 and the park is probably close I think to an actual branch, but 35 and 36 Herald Square and 57th and Lex are really banking centres where we will have obviously a branch but more importantly a number of teams of both commercial bankers and private bankers who are busy at those locations. So we believe that banking people’s banking habits have changed dramatically over the last five years that it is very rare to see long lines of people in branches any more owing to the fact that so many people both consumers by the way and commercial customers have opted to electronic methods of transacting with banks and so we think that that helps us a lot.

There is not a need to go into New York and build 40 branches. We probably over the next few years that we end up building three or four more at least in Manhattan, that would be a lot, but right now we are going to concentrate on what we have.

Matthew Clark - Credit Suisse

Okay. Great. Thanks.

Operator

Our next question is from Herman Chan from Wells Fargo Securities. Please go ahead.

Herman Chan - Wells Fargo Securities

Thanks John you mentioned the other writing process in Florida, can you talk about how you expect to operate credit underwriting process for the New York operations and give some colour on the hires you've made there?

John Kanas

Yes, we've brought -- we brought back his full name is Jim Stagnari who worked with John and I in New York for I don’t know John how many years was Stagnari was.

John Bohlsen

15 years.

John Kanas

15 years. So the chief underwriter in the New York market is Jim who spent 15 years at least with us and then before us with other banks in New York and he held that underwriting team.

Raj Singh

He was the Chief Credit Officer of North Fork Bank.

John Kanas

Yes he was the Chief Credit Officer. So that is we are not trying to -- we are not trying to make the New York loans from Florida and conversely we don’t try to make Florida loans from New York.

John Bohlsen

Underwriting is localized to the market.

Herman Chan - Wells Fargo Securities

Understood. Thanks. And Raj I guess can you talk about the credit strategy for New York? I think John mentioned that the New York operations would be predominantly funded by New York deposits. Talk about the build-out there, expectations for cash flow deposits relative to the higher cash flow deposits you have in Florida. Thanks.

Raj Singh

The deposit franchise that we expect to build in New York will be predominately commercial and maybe a little bit of small business and virtually no consumer. And the cost of funds wants it -- it matures, it will start up little high because we will have to put out strong rate to start the franchise.

But eventually, as it matures, we expect the cost of funds to be meaningfully lower than the cost of funds in Florida or put in another way if you look at the cost of funds of just the commercial business in Florida and compared to New York, it will be very similar. And that cost of funds in Florida right now is in the 32 to 35 basis points, I don’t have the exact number but it’s in 30’s versus our total cost of funds, which is in the high 60’s right now.

Herman Chan - Wells Fargo Securities

Understood. Thank you very much.

Operator

Our next question is from Gerard Cassidy from RBC.

Gerard Cassidy - RBC

Hi, John.

John Kanas

All right, Gerard.

Gerard Cassidy - RBC

Can you give us some color on the growth that you’re expecting in New York? Do you sense -- I know you just mentioned there will be some multi family in there but you’re finding that the growth is coming from customers of large national bank or their other community banks. And if you had to estimate at the end of the second quarter, will 90% of the growth fee, commercial real estate related, 10% commercial loan related?

John Kanas

John, for this quarter, what would your answer be to that.

John Bohlsen

I say, Gerard you’re about right. Most of the growth rate now would be in the commercial real estate side and with multi family. This C&I side will be little slower in growth and the lot of it will be commitments, more than it will be outstandings.

Gerard Cassidy - RBC

It will grow fairly quickly.

John Kanas

Thinking about multi family as being in the commercial real estate category, which is where the regulator is. That kind of think of it. So it’s a real mix bag for us but as I said we’re not overly depended on multi family in the beginning because of the tremendous pricing pressures that we’re seeing. That will change over time but right now that’s something.

And in terms of where these things are coming from. This is our folks. At least so for, I would say 95% of this is just folks that bank with John and I for decades, that are coming back. Some of them remained where they were when they left and some of them ventured off into other institution and are coming back, coming back to us.

We remember these tend to be very large customers in New York on the deposit side as well as the loan side. So it doesn’t take -- it doesn’t take a lot of transactions to move the needle significantly. But we’re very impressed with the receptions, frankly we’re trying to move slowly in hiring people because we started at New York with no customers.

And John and I both are looking at each other last week. So we were going because we’re not getting too bigger pipeline of request and we needed to step up the hiring a little bit more this quarter to make sure that we don’t fall behind. So, very encouraging so far and I don’t see any reason why that should change.

Gerard Cassidy - RBC

From the early start, what’s the average size, would you guys estimate that you’ll have in New York in terms of per loan average when you put these loans on the books?

John Bohlsen

We’re putting about $5 million. Right now, John it’s about $5 million as the average size at the commercial loans, the commercial loan…

John Kanas

That’s commercial gear. And that will improve as we move into different categories over time that the C&I loans tend to be smaller and the real estate loans tends to be large.

Gerard Cassidy - RBC

Sure. And then Raj, you mentioned about having higher rates initially into New York to gather those deposits. How much higher are they versus the average rates that you see in that market place?

Raj Singh

Not higher than what -- we’re not trying to the beef that absolutely top in the market. I’m just saying that initially what will you see rates, deposits costs in the New York platform, you should expect that to come down over time. As you go out, you go out trying to sell a money market account and the small DDA, and hope the DDA then grows and work. So the balance change and the cost of funds come down.

That’s typically how any new branch will get launched. So I expect to say -- see some more of the same but it’s not like we will go out with 1% money market rates that’s not the point.

John Kanas

Yeah. And then to sort of clarify that further, it’s and Raj is right, it has more to do with the mechanics of getting this relationships going. They bring over their interest-bearing accounts first. And then the non-interest bearing DDA accounts build up overtime as we close the loans and start doing more business with these individual customers.

Gerard Cassidy - RBC

Just speaking of deposits, Raj do you guys have mobile app for your customers. And if you do, what percentage of your customer base is using the mobile app to make move money around in their accounts?

Raj Singh

It’s not a significant number. It’s more of retail products as we’ve not been focus on growing retail deposit. So we do offer mobile banking but it’s not something we’re pushing.

Gerard Cassidy - RBC

Fine. And then finally, John, can you give us some more color. I know the situation in Tampa was a fraud as you pointed out but may be give us a little background on how you guys got involved in the organization with an existing relationship that one of your loan officers hadn’t brought over. What happened there?

John Kanas

Yeah. I’m going ask for John’s help on this but these things has been written about widely down here. The individual behind this credit up until time -- up until the time the place was closed down by the FBI was a very, very prominent doctor in Florida, very -- politically very powerful guy, very wealthy individual, somebody who is very highly thought of in this community. And John?

John Bohlsen

It’s a 10-year-old company. We’ve got everybody over there right now, DOJ and FBI and whatever. We've based our loan on -- really was a fraudulent statement back in December of ‘11. And we discovered all this fairly recently and everyone's in their right now trying to get to the bottom of it.

John Kanas

They had said, just get to us, John, do you remember this, I mean.

John Bohlsen

It was a shared national credit. Basically we were the lead bank on it. And one of our lenders was familiar with them. Obviously, we’re looking for business in that St. Petersburg, Tampa area and they look good. But it was a very good credit.

So, these are type of things in landing. You really can’t do much about. You try to do as much of the underwriting effectively as you can but it's a fraud, it’s a fraud.

John Kanas

Yeah. We’ve actually taken that loan, Gerard, and spread it out on the table and go to lenders around and said okay, let’s do the postmortem here. What if we do wrong and how could we have avoided this thing. And to be frank, this is one of those things, it’s one of the million where honestly I support the lender here. There is not much. This would have been a tough one to see coming based on -- you just don’t expect in a company like this that we’re so visible down here in Florida and so many people move out knew about to be completely fraudulent and..

Raj Singh

In a regulator industry.

John Kanas

In a regulator industry like healthcare. So the things…

John Bohlsen

And mostly, she has been with us John since the beginning on this. So they’re very well aware of this and they’ve been working for this.

Raj Singh

I just want to repeat what John said. Well, this is a shared national practice, this is not some participation we bought. We actually led this loan. We led this loan

John Kanas

Well, clearly our mistake but they say if you want to sort of, we always look back in these things and say what's the lesson learned here. The lesson learned is that somebody is going to completely fabricate a story. It’s tough to figure it out at the begging. And that’s what -- and this guys, I mean this story is not over. The FBI and department of justice is sitting there now and the word locally is people going to do time over this one.

Tough to sidestep those, obviously -- obviously big mistake on our part but look when you're making wrongs, once in a while lightning will strike you.

Gerard Cassidy - RBC

Thank you for the color. Really appreciate it.

Operator

Our next question is from Joe Fenech from Sandler O'Neill. Pleased go ahead

Joe Fenech - Sandler O'Neill

Good morning. Leslie just a point of clarification, you said you expect expenses to go up $6 million in the quarter, but then I thought I heard you say up $6 million in the second quarter and then level off? I’m assuming you meant the latter, can you just clarify that?

Leslie Lunak

Yeah. Joe (inaudible).

Joe Fenech - Sandler O'Neill

Okay. Okay. Then on the margin, Leslie, you said margin of $5.25 expected for the year. Does that include the expected impact from loan sales and also do you factor in any further anticipated reclassification from non-accretable to accretable or that just kind of be gravy on top?

Leslie Lunak

It does include the expected impact from loan sales, as we expected them to materialize today, obviously that could be somewhat volatile. We are not projecting significant additional increases from that to accretable all that could happened.

Joe Fenech - Sandler O'Neill

But margin is $5.25 for the year or that’s you expect to trend down by the fourth quarter?

Leslie Lunak

For the years, so it will trend down to just north of $5 for the fourth quarter based on a current projection.

Joe Fenech - Sandler O'Neill

Okay. And then on the loan growth, John, so $200, I just want to clarify, there is $200 million this quarter from New York and then two quarters out, am I correct in saying, you're reiterating your prior target of about $$0.5 billion a quarter and you're saying that conservative is that right?

John Kanas

Saying that the $200 million prognostication of this quarter is according to our lenders probably conservative and it’s probably too early to say whether the $400 million, $500 million sort of run rate of growth out later this year is conservative. I will say this that if the trend continues that that could be conservative and if New York stays healthy and continues to grow that could be conservative. It’s too early to sort of over promise there but we are extremely comfortable with the estimates that we've made going back as much as a year ego, they hold true today and we are -- many of us are feeling like we might do better.

Joe Fenech - Sandler O'Neill

And then matching that level of growth per quarter in Florida for the foreseeable future?

John Kanas

Yeah.

Joe Fenech - Sandler O'Neill

Okay. Thanks guys.

Operator

And our next question is from Erika Penala from Bank of America.

Unidentified Analyst

Good guys. This is [Ibraham] on behalf of Erika, just one final follow up question John, I guess in terms of the New York expansion, looks like you got the infrastructure in place, but just tying that in of it the expense guidance sort of flatten out from back half of the year. Should we expect that you sort of done in terms of brining on talent and hiring in New York for now or can there still be additions, especially from our standpoint of bringing on new revenue producers, which could lead to, yes, high expenses but high revenues down the line?

John Kanas

80% of the top level staffing is done in New York, there is a few more top level people that we are talking to right now that we expect to hire in the next 30 to 60 days, but and as always the revenue follows those people, a quarter or too later, but 80% of that done. Our Market Manager -- Market President is hired, the Head of Real Estate Lending is hired. We are in communication with lot of the C&I lenders that will be joining us, but haven’t announce those yet and are in the process putting together underwriting, the C&I lending and we are in negotiation with those people who are well known to us have not hired yet. So we're pretty following the way there.

Unidentified Analyst

Got it. Thank you very much.

Operator

And that was our last question. I’ll turn it back over to you for any final remarks.

John Kanas

I think in some instances and some are doing extremely well given the particularly difficult environment for banks, who make their money on the margin line. What defines us and such a support from the rest of the industry is the fortuitous fact that we are in to the big growth market on the East Coast and that the impute growth rate of this balance sheet and the change in this balance sheet overtime are more optimistic than you might find in most banks.

As such so no relief from margin pressure, as I see it for the whole industry us and anyone else, significant amount of asset growth coming for us, hopefully some news in the M&A line this year. We are aware as many of you are, the lots of people are thinking along those lines and there is embedded opportunity there as this industry hopefully consolidates around this and we find opportunities to control expenses through consolidation and very, very healthy balance sheet.

Strong capital metrics, continued healthy relationships with regulators which many of you have heard me said before is much more important than it's ever been in this industry and a lot of optimism coming from our customer facing people in both the New York and in the Miami markets.

So, another good quarter and on track for what we expected to, where we expected to be by this time last year and look forward to the remainder of 2013. Thank you very much for calling in and listening to our story and look forward to seeing you on the road along the way. Thanks

Operator

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

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