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BankUnited, Inc. (NYSE:BKU)

Q1 2014 Earnings Conference Call

April 24, 2014 9:00 AM ET

Executives

Mary Harris – Senior Vice President, Director of Marketing & Public Relations

John Adam Kanas – Chairman, President and Chief Executive Officer

Rajinder P. Singh – Chief Operating Officer

Leslie N. Lunak – Chief Financial Officer

Analysts

Brady Gailey – Keefe, Bruyette & Woods, Inc.

Kenneth Zerbe – Morgan Stanley & Co. LLC.

Robert Placet – Deutsche Bank Securities, Inc.

Mathew Clark – Credit Suisse

David Darst – Guggenheim Securities LLC

Gerard S. Cassidy – RBC Capital Markets LLC

Herman Chan – Wells Fargo Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to BankUnited’s 2014 First Quarter Earnings Conference Call. My name is LeAnn, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mary Harris, Senior Vice President, Director of Marketing & Public Relations. Please go ahead?

Mary Harris

Good morning, and welcome. It’s my pleasure to introduce our CEO, President, and Chairman, 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 reflects the Company’s current views with respect to, among other things, future events, and financial performance.

The Company generally, identifies forward-looking statements by terminologies 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 the company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as 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 operation, financial results, financial condition, business prospects, growth strategy, and liquidity.

If one or more of these other risks or uncertainties materialize, or if the Company’s underlying assumption prove to be incorrect, the Company’s actual results may vary materially from those indicated in these statements. These factors should not be considered 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, 2013 at the SEC’s website, sec.gov. John?

John Adam Kanas

Good morning, everybody. Quite a number of folks on this morning, so we’re willing to give you a quick overview. Most of you’ve seen these numbers that we put out at 7:30 this morning. Obviously, and when I’m done with my overview, I’ll turn it over to Raj, who will then take it over to Lesley for a little bit more granular discussion.

We’re pleased, obviously, we’ve been sitting here for two years, telling you that our quarter-to-quarter EPS is going to decline as the FDIC asset runs were up, and as loans grow, and while we still believe that is going to happen, and it’s coming later this year, we certainly dodged the bullet this quarter, and have put up what I think are quite spectacular results.

This is, this $0.53 shy of 11.5% ROE, and just shy of 1.5% ROA. We are under the same pressure that all banks are in this environment, which is certainly stressful for banks, and you can see that our margin came down slightly.

Again, we have the benefit of having our margins start at a much, much higher place than any other bank. And actually, the yields on new loans for the quarter stabilized, actually up a couple of basis points. So very pleased with that. But this is an industry that’s under a lot of pressure from the market, and with interest rates, we’re all looking for the illusive increase in interest rates that will have a positive impact on ours, and most other banks’ earnings; and our prognosis is that, that’s still far in the distance.

We had spectacular growth for the quarter, a little over $1 billion, $1.1 billion. And distribution of that loan growth is, is as we’d hoped and predicted and decided to be a little over $400 million of growth out of New York, a little under $400 million out of Florida, and about a little over $300 million coming from the national platforms, and that only includes about $134 million actually in purchase. So we scale that way back as we told you that we would as loan demand continue.

We’re so fortunate to be located in what I think are two of the most robust markets in United States right now; Miami and Manhattan. Raj and I drove through Miami last night. And he hadn’t been here in three weeks, and I think there were three new buildings along Brickell Avenue that weren’t there three weeks ago.

And I’m not – that’s not an exaggeration, I mean, Miami is bursting again, and not just with high tower condominium projects, but with a substantial amount of user building in the middle of town, and many of them – most of them are our mixed user commercial, partially commercial, partially residential use.

So we are seeing an amazing resurge growth in the South Florida market. The better part of the news is, in Florida that growth in South Florida has now started to infect the rest of Florida in a very positive way. The Tampa market continues to be a very, one of our favorite markets for growth in the next part of the cycle, and moving up north in Florida into Broward County, we’re seeing meaningful improvements in both real estate and general commercial activity. Most of the growth, as you see is commercial and CRE and that’s just under $1 billion of it, and only $85 million came from indirect auto.

Since we’ve been growing into our capital over the last couple of years, and as we get closer to fully deploying all of this capital, we spent a lot of time now thinking about the different asset categories that we want to get bigger in, and stay in or leave, and an example of that is that, we’re now looking at the asset categories individually, and right now, the line of business that’s under the microscope for us is indirect auto finance.

We’re fully aware that, that’s a low margin business that it is also in the crosshairs of the regulators these days. And so while we look at all of our lines like that, that’s one that we’re – that we’re studying right now. And as we continue to grow this way, we will get stingier with the deployment of capital against asset categories that don’t make sense for us, especially when we have a choice. And because of the diversity of the markets that we’re in, we do have a choice.

Pricing, of course continues to be very competitive, both in New York and Florida. Frankly, mostly in the real estate business in New York City, we’re seeing some new entrants into that market, so people who haven’t been in that market before, who are trying to make names for themselves, and develop a reputation there that are selling prices around it. Quite frankly, we’re not ready to compete with. So, we’ve chosen to turn away from some projects in New York.

We’ve also chosen to turn away from some projects in Florida, where we’re getting the same kind of pressure. Although, even having to turn away from some of those things, as you can see, we still continue to have plenty of loan demand in both markets.

And from all – from every angle we look at, both of these markets, it certainly would appear that certainly for the balance of this year, and on into next year that, the vibrant growth in these markets is likely to continue.

So, book value has gotten to almost $19.5, $18.80 tangible. And our Tier 1 leverage is still about 12%, risk base is just under 20%, and total risk base, that’s Tier 1 risk base, and total risk base at 20.3%.

So, all-in-all, very well we would have liked to be in, if we could have written this report 90 days ago, and while we are very optimistic about the markets in the future, and we’re very optimistic about this company in general. One shouldn’t forget that this is a – this is an industry that is fighting a number of different issues, one of which is the market, which has led to unfortunately historically low margins for the industry, and we don’t see any real improvement there in size.

And as soon as we start thinking, we understand what the fed is saying, they seem to go the other way, so whether that’s intentional or unintentional, it’s pretty difficult right now to predict the direction of the interest rates going forward.

So, we continue to not try to do that. We continue to keep an extremely neutral position on the balance sheet, so that whichever – whichever way interest rates go, we do not, we do not bet their edge here, and we are – and I’d remind you that we still are facing some quarters ahead of us where earnings per share will be under pressure.

Again depending upon how quickly loans grow, and how quickly the FDIC asset strikes, but this quarter shouldn’t be taken as evidence, but that’s never going to happen. It is going to happen. But it also, if our prognostications are right, it also turns out and starts to go in the other way in 2015 and beyond.

So, we’re very, very pleased with the growth. We’re very, very pleased with the profitability. We’re extremely pleased with the markets, health that we operate in, and look forward to – look forward to the rest of this year with enthusiasm.

I’m now going to turn it to Raj right now, who’s going to talk a little bit about – just about everything, the deposit trends and et cetera.

Rajinder P. Singh

Thanks, John. I’d like to point out this quarter, we will be celebrating our fifth anniversary as a Company. We started the Company in 2009; and on May 22, we are celebrating our 5th birthday. It is an important milestone for a number of reasons, one being that it is the – our commercial loss share agreement, which was one of the two loss share agreements we entered into with the FDIC. And it covered the smaller portion of our portfolio, the commercial loans, that ends on May 22.

As we told you in the past, our loss share agreement was unique. We had a right to sell any or all loans at the end of this loss share, we exercised that right working with the FDIC over the last few months. We are selling approximately half of the remaining commercial loan portfolio, the other half of the portfolio we like, we would love to keep that. The sale went through in the last week of March. We got a very good pricing for that portfolio, great news for us and the FDIC, and the numbers generated about $11 million bottom line, pre-tax basis, and Leslie will talk more about the numbers.

But going forward, the commercial loss share agreement is finished. We have no more loss coverage. The residential, which is a vast majority of our loans, covered loans that runs for another 5 years.

Turning to deposits, we grew deposits a little under $600 million this quarter, and we expect to continue the deposit growth and speed it up from here over the course of the rest of the year.

Our portfolio, our mix of deposits is now looking much more like a commercial bank. DDAs stand at little over 25%, almost 26%, money market is 43%, money market and savings and time deposit is about 31%. So we’re very happy with where we are, in terms of growth, in terms of mix of deposits.

Cost of funds is now beginning to hold steady, it’s at 55 basis points excluding hedge accounting and accretion charges, sort of non-cash charges. 55 basis points will probably trend down slowly from here, but not by leaps and bounds, since we’re now focused more on growth rather than just bringing down cost of funds.

With that, let me now turn it over to Leslie, and she will get more granular into the numbers.

Leslie N. Lunak

Good morning, everybody. Kind of hit the high points, our loan growth as John mentioned is very good for the quarter, which led to an increase in the dollar amount of net interest income, although NIM itself remains under pressure, down to $5.05 million for the quarter. However, that’s actually a little better than what we had predicted, held up a little stronger than we thought, we still stand by our guidance for NIM for the year that we’ve provided to you previously.

As Raj said, the most, the unusual transaction for the quarter was the commercial loan sales, which had about $11 million pre-tax impact on earnings for the quarter. The provision that you see corresponds primarily to loan growth, nothing else really unusual going on in there, asset quality remains very strong with our non-performing loans to total loans in the non-covered portfolio at 0.24%, and allows coverage of non-performing loans at over 300%, so that the portfolio continues to perform well.

Non-interest income continues to be impacted by amortization of the indemnification asset. We currently expect that to probably hold about to where it is through 2014, and then maybe start to trend a little lower. Non-interest expense, as we’ve been guiding you in the past is starting to finally reflect, particularly in the comp line.

The full impact of the expansion into New York, and the teams, that we added last year, that are generating the loan growth, and you’re seeing that pretty much fully reflected now, as well as the impact of our merit increases and payroll taxes on the first quarter.

I don’t expect, further material increases in that line, maybe just a gradual a little bit more of a gradual up trend through the year. We iterate our expectations, the EPS will trend down the remainder of this year, and then up again in 2015. At this point, I’ll turn it back over to John, you have anything else to say before we go to questions or...?

John Adam Kanas

I think, that the point, I think Raj, is saying that we’ve – with the estimates, great quarters, don’t get the idea, we’re sandbagging here, we are doing the best we can to predict quarter-to-quarter, and some of this is somewhat unpredictable. So, you shouldn’t get the, you shouldn’t have the opinion that when we say that the EPS will come into pressure, as a result of rebalancing the balance sheet, that’s not going to happen, it will. So, let everyone be conscious there.

We take seriously, our commitment to the regulators, because this is a growing company, and we are busy continuing to build the backroom, and paying a lot of attention to what regulators like to call operational risk and spending money and time and bringing in our best people to make sure that the company keeps up with – keeps up, that the backlogs of the company keeps up with what’s going on in the front. So that we do expect a continuation of growth at approximately these levels out into the future.

We will continue to invest in the infrastructure of this company, both in human beings and technology and in process, so that we continue to keep our word to the regulators that as we grow that we will exercise due care in making sure that we keep up that in the back office.

So having said all that, let’s take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we have our first question, and it’s from Brady Gailey from KBW. Please go ahead.

Brady Gailey – Keefe, Bruyette & Woods, Inc.

Hey, good morning.

Leslie N. Lunak

Good morning, Brady.

John Adam Kanas

Good morning, Brady.

Brady Gailey – Keefe, Bruyette & Woods, Inc.

When you look at the new loan yield quarter-to-quarter, it’s been coming down around 10 basis points each quarter over the last year, that is actually flat this quarter, but it was actually up two basis points to 3.63 from 3.61. Are you all seeing better loan pricing or stabilization of loan pricing?

John Adam Kanas

Great. That is more a reflection of our exercise and care as to what kind of loans and what type of pricing that we’re willing to engage in. Fortunately for us, both of these markets are growing at such a pace that we can be fussy about the loans that we make, and the loans that we pass up. So we are passing up some loans rates that are otherwise very good credits, but frankly don’t make sense to us that what we’re seeing. So we are able to pass up those loans that don’t need our pricing standards and still grow at this pace, which I think is probably the best.

Leslie N. Lunak

Brady, that yield is really converging more on the whole on – the yield on the overall new portfolio is much closer to what we’re putting on currently. And it’s a little bit less impacted by older stuff now that may have been at a little bit higher yield as well.

Operator

Thank you. And we have a further question from Ken Zerbe from Morgan Stanley. Please go ahead.

Kenneth Zerbe – Morgan Stanley & Co. LLC.

Great. Thanks. I guess my first question for you guys, John you’ve talked obviously a lot on this call about the magnitude or the pace of EPS declining over the rest of the year. Do you guys have any estimates for how much of a decline that would expect over the next few quarters in EPS?

John Adam Kanas

Yeah. Don’t get me wrong there. I don’t – my comments aren’t intended to stress magnitude. I am just sensitive to the fact that we keep telling you this is going to happen, it hasn’t happened yet and I don’t want anybody think it’s never going to happen.

Leslie N. Lunak

Don’t think we’re lying to you.

John Adam Kanas

Yeah, don’t think we’re lying

Leslie N. Lunak

We’re not changing the guidance.

John Adam Kanas

Yeah. We’re not changing guidance.

Leslie N. Lunak

Yeah.

John Adam Kanas

So we think – we think guidance is on the money. So I just want to remind people who may not have heard us say it before that this is still out there. And so while this is a great quarter, and we expect guidance is accurate for this year. No, don’t misread it, this is not, I am not sending you a signal here that there is more magnitude than we thought.

Kenneth Zerbe – Morgan Stanley & Co. LLC.

Got it, understood. Okay. And then second question, when you look at second quarter, I think I heard that you’re done with the commercial loss share. Is there any other unusual items that we should expect to see in the second quarter based on the expiration of the loss share?

John Adam Kanas

No.

Leslie N. Lunak

No.

Kenneth Zerbe – Morgan Stanley & Co. LLC.

All right.

Leslie N. Lunak

It’s done.

Kenneth Zerbe – Morgan Stanley & Co. LLC.

Perfect. Okay. Thank you very much.

Operator

Thank you. Your next question...

John Adam Kanas

One of the benefits – just to finish it, one of the benefits and sort of goes a little bit back to Brady’s question, one of the benefits of having several different national platforms and two very, very large markets that we serve and we’re being relatively small institutional, we can be pretty fuzzy about the loans that we make. And we can be fuzzy about sort of the guidelines that we draw in terms of pricing and that’s helping us here.

Operator

Thank you. Your next question comes from the line of Robert Placet from Deutsche Bank. Please go ahead.

Robert Placet – Deutsche Bank Securities, Inc.

Hi, good morning. I was just curious if you can provide any additional color on pricing competition and any loosening of standards for the markets in general for both New York and Florida, maybe say versus last quarter. I know you guys said that, you’re maintaining your credit standards, but just any market color, John?

John Adam Kanas

Yeah, we saw – if you were to compare quarter-to-quarter, I think we probably said the last quarter that pricing was better in New York than it was in Florida that was true last quarter. This quarter, it’s about even – maybe even a little tougher in New York. The glamour of Manhattan and its robust economy has attracted a lot of the newcomers to that market. Now remember, its a trillion dollar deposit market. So a couple of small banks wondering if the New York making loans at lower rates isn’t going to change the market any, but it does – but there are people there that are doing cases we wouldn’t do in terms of rate.

And so we are backing off a little bit on that. But as I said, these markets are so big that there is still plenty of room for us to do all we want to do at our standard levels. But now I would – there is not much of a change. We’re not seeing – really not seeing any increase, I mean we're not seeing people that are really modifying terms and structure in any dangerous way. It’s mostly rate, there is a lot of people doing IOs for a certain period. We’ve done some IOs for selective customers particularly in New York because that’s the market in New York.

But some people are going a little bit too far with that in our judgment, but that’s about the same as it was. And I think – look everybody is scrambling here to put assets on the book. So they are taking as low a yield as they can stand and you can see by the industry what’s come out so far this quarter that I think that net interest margins on a consolidated basis are as low as they’ve ever been in recent history, just a tough time.

Robert Placet – Deutsche Bank Securities, Inc.

Okay. Thank you very much.

Operator

Thank you. And your next question is from Mathew Clark from Credit Suisse. Please go ahead.

Mathew Clark – Credit Suisse

Good morning, guys.

John Adam Kanas

Hi, Matt.

Mathew Clark – Credit Suisse

I think this past quarter pricing in New York multi-family became more competitive. Can you give us I know overall yields ticked up? Can you give us a drill down to multi-family in New York and kind of what you’re seeing? What you’re doing pricing wise and relative to the market?

John Adam Kanas

Yeah, on a day-to-day basis for this past quarter, there has not been a material change from January to March. As I’ve said before, there is some new entrants into the market that are trying to buy their way in, and some of the smaller deals that are upsetting a little bit the balance of pricing, but it’s not, probably shouldn’t mentioned, not even. It’s not – it’s not big change from what we saw frankly getting closely to end of last year. With regard to multifamily, particularly it’s about the same. It’s been tough since – tough since last fall and it’s about the same.

Mathew Clark – Credit Suisse

Okay. And just switching to expenses, I think this quarter looks like, I think you had previously guided a 10% comp expense growth for the year, it looks like you’re running a little bit ahead of that. Are there any, can you quantify maybe some seasonal adjustments that might occur in 2Q, I mean, do you still believe that that run rate of $49 million could still gravitate a little higher. Could we step back a little bit here in the second quarter?

Leslie N. Lunak

I think it could gravitate a little bit higher, Matthew, but not, probably not materially so. One of the things you see in the first quarter is the impact of payroll taxes and what not in all our merit increases from last year kicking in and that will stay with us throughout the year. It could gravitate a little higher, but I don’t expect it to be materially better.

Mathew Clark – Credit Suisse

Okay. And then with the growth at New York being 400, it seems like that’s partly seasonal. Do you get, I mean, could we see that start to accelerate throughout the balance of the year and it doesn’t look like you’re relying less on resi purchases. So, I mean, do you believe that we could step-up that $1 billion or so run rate going forward?

John Adam Kanas

It’s very hard to say. I mean, as I said earlier, we’re trying to cherry pick what we want to do here. We said $4 billion, $5 billion worth of growth for the year. We’re on track basically for that kind of growth. And it’s going to vary from quarter-to-quarter, sometimes these closings slip over from the 30th of the month to the first of the next month.

But we’re – I should say this, we’re controlling our growth. I mean, we could be growing frankly a lot of test than we are. We have far more a loan demand than we can swallow. So we are going to continue particularly with rates at these levels, we’re going to continue to govern what we do.

Mathew Clark – Credit Suisse

Got it. Thanks, guys.

Operator

Thank you. Your next question comes from David Darst from Guggenheim Security. Please, go ahead.

David Darst – Guggenheim Securities LLC

Hey, good morning.

John Adam Kanas

Hi, David.

Leslie N. Lunak

Good morning, David.

David Darst – Guggenheim Securities LLC

Could you talk about the national diversification and what’s the sustainability of the capacity to grow that? And then is that also benefit from an asset sensitivity perspective relative to booking a lot of five year loans at lower rates today that could have some issues in 24 months, 36 months?

Leslie N. Lunak

Yeah. The national portfolio stands now at a little over a $1 billion. So, half of that approximately is in our municipal finance subsidiary, about $300 million in our small business lending subsidiary and the remainder in our equipment leasing company. All of those businesses I think the growth trajectory that we’ve been seeing is sustainable. I think this quarter may have been a little bit of seasonal low for some of those businesses.

From a rate perspective, obviously, if rates go up, the yield curve steepen. We’ll see new production come on at a higher rate. The small business and equipment financing businesses tend to be some of the higher yielding portfolios that we have and new wages because of their nature, probably more of those portfolios tend to be more fixed and floating, but they’re shorter-term for the most part, so I think yes, we would see some benefits from rate in those portfolios, not – I wouldn’t say we’d see a lot more benefit in those portfolios than we see anywhere else, as rates go up, but we will see some benefits.

John Adam Kanas

And the market is pretty big.

Leslie N. Lunak

Yeah.

John Adam Kanas

These are very small operations.

Leslie N. Lunak

Yes.

John Adam Kanas

And there is a lot of different growth and so.

Leslie N. Lunak

Absolutely.

John Adam Kanas

So, if I take a very long-term view of three years, four years, five years, this could grow to many times its size, we just don’t want it to be too large a part of the bank, it’ll always be a small part of the bank, but as the bank grows, there is a – from a market point of view, there is a lot of headroom here, we can grow the business quite a bit.

Rajinder P. Singh

You all heard me say this before, particularly those of who you know me in my prior life that it’s never been our strategy to dominate a market. It’s always been our strategy, an old bank analyst, a friend of mine, used to say, what I want is a little piece of a big thing for a long-time and, that’s us. And we have a little piece of several big things and we intend to do that for a long time, and that gives us pricing power and the ability to discriminate in the kinds of assets we put on the books and to exercise care if one market is looking weaker than the other. So, I mean, it’s sort of the best of what we are...

David Darst – Guggenheim Securities LLC

Okay. And then, Leslie, we’re seeing some variability tax rate, do you have any guidance for what you should look for the year?

Leslie N. Lunak

I do. We had an adjustment this quarter that were related to some changes in New York State Tax law that were enacted during the quarter. I think you can expect an ETR on the whole of between 36 and 36.5.

David Darst – Guggenheim Securities LLC

Okay, great. Thank you.

John Adam Kanas

That should be in general with an ERP.

Leslie N. Lunak

Yes. Little bit of a benefit.

John Adam Kanas

New legislation.

Leslie N. Lunak

Little bit of a benefit for this quarter in New York.

Operator

Thank you. Your next question comes from Gerard Cassidy from RBC. Please go ahead.

Gerard S. Cassidy – RBC Capital Markets LLC

Thank you. Good morning John, Leslie.

John Adam Kanas

Good morning Gerard.

Leslie N. Lunak

Good morning Gerard.

Gerard S. Cassidy – RBC Capital Markets LLC

I had to jump off for part of the call so I apologize if you’ve already addressed these answers to these questions. But first, John, on the leverage ratio, where do you think, that should get to before you have to start to maybe consider putting some more capital into the company?

John Adam Kanas

Yeah, we’ve been saying 9-ish, certainly starting to think about very hard in the 9-ish range. It will also depend on the velocity of our growth, when it gets there. If we’re seeing growth that’s outstripping our expectations at that time, we might start it earlier than 9-ish, certainly by 8.5 we’re into it. And I don’t see any reason why – given where we are in these markets, why we shouldn’t work our way down to that level, as we said in pretty short order sometimes drifting.

Rajinder P. Singh

And Gerard, some of it is also little market driven. We’ll be opportunistic based on where capital markets are at various times. We certainly don’t want to wait till the last quarter when we need to raise it, because nobody wants to take that risk. So we will start paying attention to where the capital markets are later this year, and keeping our eyes and ears open and when we find the right opportunity, we’ll with the right instrument we’ll do something.

Gerard S. Cassidy – RBC Capital Markets LLC

The 8.5, 9-ish level that you’ve identified as the point where you would choose to look to raise capital, is there any thought of allowing that to go lower since I assume your regulatory requirement, you’re obviously not part of those, the SLR. So a 3% is the – obviously the number on leverage where the minimum you have to be at, but – what’s the focus on the 8.5 times?

John Adam Kanas

I missed the question. We understand that because this – there is a lot of regulatory oversight today, for all banks. When you’re running a bank that’s growing at this rate, regulator is paying attention to what we’re doing. And they’re being cautious as we’re being cautious, and holding us, I believe that the banks hold – a bank that’s growing like this to a higher standard than a bank that’s not growing, that’s – in a part of the country that’s not growing at all. So, we would air on the side of caution here by raising more sooner than pushing our luck with the regulators and going too far the other way.

Gerard S. Cassidy – RBC Capital Markets LLC

Okay. In regards to the loan growth in the quarter, the New York portfolio, the growth that you showed there, how did that breakout between traditional commercial real-estate versus C&I?

John Adam Kanas

Hold on a second.

Leslie N. Lunak

Gerard, I don’t have it handy, but if you want to give me a call later, I’ll give you – I’ll run through that with you.

John Adam Kanas

Yeah, I’d be guessing, it certainly weighted toward commercial real estate.

Leslie N. Lunak

It is, but I don’t have the numbers right in front of me.

John Adam Kanas

And that would include multifamily too. So we’d get back.

Gerard S. Cassidy – RBC Capital Markets LLC

Okay. And then, in terms of the National portfolio, you mentioned this quarter that your consumer loans, which are primarily indirect auto grew by $85 million, and that was down quite a bit from the fourth quarter number of 180, was it your choice to pull back, or is it just lack of demand, what caused the rate of growth to slow?

John Adam Kanas

That’s indirect auto.

Leslie N. Lunak

I think, that’s a market, where we’re being a little bit cautious right now, Gerard, because of both yield and regulatory compliance considerations. So, I would say, it was more our choice, I’ll let…

John Adam Kanas

I’m not sure, whether you were on – during that part of the Q&A, Gerard but, one of the comments I made is that, we are looking particularly at that business. And as we begin to deploy this capital, we’re getting more and more discriminating about, where we’re willing to put capital to work, and that’s one of the businesses that’s low margin, and in the cross sales with the regulators, and something we’re giving a lot of, where we’re giving a hard look at.

Gerard S. Cassidy – RBC Capital Markets LLC

Okay. And, final question, Raj, in the past you talked about your cost of funding coming down – slow again, which was great. Where do you think the cost of deposits could eventually bottom out? So, I think, you mentioned, it was about 60 basis points this quarter, how well can that go from here?

Rajinder P. Singh

Gerard, honestly, I don’t know. What we do know is, we push it up until the point, where it is too painful to push it. So, we’re still cutting rates, but we’re doing it much slower, because right now, priority number one is to grow the deposit base. Roughly, the two costs of funds, where we’re paying on the depositors is that 55 basis points. If you take out the accounting noise, you come to about 55 basis points. It feels like a good place, it’ll probably go down, it’s not going to go down to half that. But, I’m really more focused now in growing deposits down on tricking the cost of funds, which has been the battle cry for the last four or five years.

Gerard S. Cassidy – RBC Capital Markets LLC

Great. Thank you.

Operator

Thank you. (Operator Instructions) And your next question is from Herman Chan from Wells Fargo. Please go ahead.

Herman Chan – Wells Fargo Securities LLC

Thanks. Another question for Raj, that follow-ups on the previous comments. You mentioned a pickup in deposit gathering going forward. Can you give some color on the drivers of that?

Rajinder P. Singh

A lot of our deposit growth, even this quarter did come from New York. So New York is doing very well, we mentioned very heavily in people, I won’t say in branches, but really in people and they are bringing in a lot of business. It comes in erratically, because you know, these are relationships that take a long time to bring over.

So, it’s a little harder to predict. Florida, it’s a combination of consumer as well as commercial growth. And, on the consumer side, I hate to say it, but still a price gain. If you advertise and you put a decent price out there, money comes in. And it’s the sensitivity is within 5 basis points to 10 basis points, you can move the needle quite a bit.

On the commercial side, the story is similar to New York, where we’re using our incentive plans and incenting our sales force both commercial lenders as well as private bankers who bring that business in. So, in national business, obviously there is no deposit. So it’s a combination of those things and it’s a bigger focus for us, since last summer than it had been before this. So there were some changes that we made to the incentive plan to track some that we’re making even as we speak, which will have an impact on – on behavior inside the company over the rest of the year.

John Adam Kanas

Herman, our strategies are very different between Florida and New York, and Raj is absolutely right. So the account size tends to be larger in New York and the growth there tends to be driven by relationships. We’ve hired teams with relationship bankers and we’ll hire more relationship bankers, but not necessarily more branches, at least no considerable number of branches.

And so, one of the things that gives me comfort is, we’re highly diversified not only in the asset side of this balance sheet, but also on the liability side. So we know that by turning the dial little bit up in Florida on these 100 branches of consumer loans, I mean the consumer deposits, we can bring deposits in over the trends in by adjusting rate. And in New York, we just hired more relationship people that tend to bring in these larger commercial relationships. So, right now, it’s a combination of both things. I think Raj is right. Our forecast here for growth over the next year and a half would certainly imply that we’re now starting to pay more attention to funding, and to deposit growth and you’ll see that.

Herman Chan – Wells Fargo Securities LLC

Right. Understood. Just following up on that your loan to deposit ratio has advanced to about 90% versus 67% a year ago. Given you’re expecting some pickup in deposits how do you think that ratio sort of shakes out over the next couple of years?

John Adam Kanas

Well, I’m not crazy about going over 100, I can tell you that although lots of things fit comfortably in that branch. So between 90 and 100 is sort what our target is.

Herman Chan – Wells Fargo Securities LLC

Great. Thank you very much.

Operator

Thank you. I would now like to turn the call back over to Mr. Kanas for closing remarks.

John Adam Kanas

So, in summary, a great quarter for us. We’re very pleased with the results, both of the markets, all of the markets that we operate in are bouncing back impressively. Every indication is that safe growth in both – and all these markets remains ahead of us. The asset quality, which really I talked about, as you can see, has remained I think stellar and we don’t see any erosion of asset quality in the forecast.

What you’re not seeing in this bank that you see in every other bank is, a lot of banks this quarter have made it by reducing non-interest expenses and by returning reserves. And this company is just the opposite. I mean we’re not returning reserves, we’re building reserves and we will continue to build reserves as we build the size of the loan portfolio and we’re going to continue invest in the company as we go forward, because we’ve got great momentum and we don’t expect to interrupt that momentum. So it’s one of the few bankrupt stories in the country and we’re very pleased that we all where we are and if you had to sort of write the script for this a year ago, this is where we hoped to be and look forward to rest this year and on into next, certainly these markets.

We talk a lot about Miami, because Miami is a scary market. South Florida is a scary market and everyone knows that these kind of markets that are so hot tend to get overblown from time-to-time.

So, we spent a lot of time and sitting here with me today is Tom Cornish who has been recently hired to run Florida for us. Tom and I have been spending a lot of time recently with some of the people who are plugged in intimately to what’s going on in the building cycle here in South Florida and we’re hearing all good things and that is a lot of pent up demand, tremendous number of new users coming to the market.

Not seeing any over leveraging going on in the banks and not being overly aggressive as they once where, lots of, I mean this all started a few years ago when you heard me talk about the excess acquired condos and the other Latin American community came in and swept them abrupt, it’s not just about American community anymore that’s stewing the growth of South Florida. Other parts of the country have noticed it and big money is finding its way to Florida from the Northeast.

Another winter like this, and I think New York will be empty and Florida will be overcrowded. But every indication is that this market is going to remain strong for the foreseeable future and of course New York is New York, and it’s so big and so strong that for a small player like us, we share that market as you know and several other banks would do what we do MMT, Signature, and couple of others and there is room for all of us to grow at these kind of levels and hard to even be noticeable.

We like that role. We like that position that we’re in. So, we don’t get unduly influenced by strong movement in any one of these markets and we have a lot of vision forward in these markets to our sources and our context.

Tom has spent 25 years here in banking in Florida and knows everybody and so we’ve got even a better view into what’s going on. John Bohlsen, who is not here with me, but he’s on the call. John has been lending money in New York City for 35 years with me. We know everybody who’s everybody in that market. So we tend to get early looks at what’s going on from the people that we know intimately in those markets. So we’re very happy with that position and we’re happy with results to date. I’m done, unless anyone else has a question.

Thank you very much for calling in and talk to you in 90 days. Bye-bye.

Operator

Thank you. And thank you for your participation in today’s conference. That does conclude the presentation. You may now disconnect and have a great day.

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