BankUnited's (BKU) CEO John Kanas on Q1 2016 Results - Earnings Call Transcript

| About: BankUnited, Inc. (BKU)

BankUnited, Inc. (NYSE:BKU)

Q1 2016 Earnings Conference Call

April 20, 2016, 09:00 ET

Executives

Mary Harris - SVP, Marketing & Public Relations

John Kanas - Chairman, President & CEO

Raj Singh - COO

Leslie Lunak - CFO

Analysts

Stephen Scouten - Sandler O'Neill & Partners

Dave Rochester - Deutsche Bank

Steven Alexopoulos - JPMorgan

David Eads - UBS

Ken Zerbe - Morgan Stanley

Lana Chan - BMO Capital Markets

Brian Horey - Aurelian Management

Jared Shaw - Wells Fargo Securities

Matt Kelley - Piper Jaffray

Gerard Cassidy - RBC Capital Markets

Operator

Welcome to the BankUnited First Quarter 2016 Earnings Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Ms. Mary Harris, Senior Vice President of Marketing and Public Relations. Ma'am, you may begin.

Mary Harris

Good morning and welcome. It's my pleasure to introduce our Chairman, President and CEO, John Kanas. But first, I'd like to remind everyone that this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company's current views with respect to, among other things, future events and financial performance. The Company generally identifies forward-looking statements by terminology such as outlook, believes, expects, potential, continues, may, will, could, should, seeks, approximately, predicts, intends, plans, estimates, anticipates or the negative version of those words or other comparable words. Any forward-looking statements contained in this call are based on the historical performance of the Company and its subsidiaries or on the 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 materialize or if the Company's underlying assumptions prove to be incorrect, the Company's actual results may vary materially from those indicated in the 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 development or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the Company's annual report on Form 10-K for the year ended December 31, 2015, at www.sec.gov. John?

John Kanas

Good morning, everybody. This is a good, solid earnings quarter for BankUnited at $0.51 per share, $54.9 million. I'd like to take a few minutes to focus on the economic and operating environment this past quarter. As you know, the quarter was characterized by a lot of market volatility and uncertainty, whether we're talking about expectations around the U.S. or global economies; the elections, interest rates, equity markets, commercial real estate chatter and bond market ups and downs. The environment does seem to have stabilized somewhat toward the end of the quarter. And we believe that the U.S. economic fundamentals remain strong and continue to expect the economy to move forward.

As we have talked about many times over the last quarter, we continue to see strength in our primary markets that is Florida and New York with the only exception being the high-end condo markets in Manhattan, the very high-end condo markets in South Florida which we have referred to over the last couple of months. In terms of economic performance, with regard to Florida, Florida's GDP is growing at 3.2%. Its payroll job creation is at 2.3%. The retail sales are up 4.7%. The house price appreciation in Florida year-over-year for 2015 was almost 12.5%. The pace of housing starts is expected to increase over the next two years, but not fast enough to meet demand. Single-family home inventory now is down to 4.4 months. 34% of home sales and 61% of condo sales statewide have been for cash.

On the CRE front, in Miami they can see rates across property types were significantly lower than historical averages in all of our major markets. Miami specifically, apartment vacancy rates are at 28% below historic averages; office vacancy rates, 13% below historical average; and industrial properties, 28% below historical averages. From now through the end of 2017, across all major product type, rent growth is expected to continue but at a decreasing rate. Cap rates are expected to remain relatively constant in Florida and increase slightly, driven by the high end of the market. And as I mentioned earlier, the only softness that is worth mentioning is in the very high-end market, a market that, as you know, BankUnited does not involve itself in Florida or in New York. With regard to New York, rent growth has slowed for the first time due to the softness at the top of the market. But the middle and the bottom and where we operate, remain very firm and in fact are improving.

Population and employment trends are experiencing growth. Through 2017, cap rates are projected to increase slightly in New York. The rate of rent growth is expected to slow, but remain above long term historical averages. Similar to Miami, as we've stated previously, we see a softening at the very high end. This is by the billionaire condos that were built around the park starting three or four years ago. The earlier units that were built actually have done pretty well. John and I toured one the other day for one of our customers. The building is 75% sold out. And the one down the street that you can see from that location is also 75% sold out. But the ones that got started later are slower. And there's actually been several projects that have been put on the shelf, waiting for better local economic conditions. Specifically, the vacancy rates are currently averaging 3%; high-rise, close to 4%; and garden apartment, 1.5%.

Rent growth rates are currently 4%, almost 6% for garden and 2.5% for high-rise, again, driven by the high end. The two-year forward projection of rent growth rate of 3.2%, a vacancy rate of 3.7%, cap rates currently just under 4%, driven by interest rates and rent growth. Turning back to us for the quarter, earning assets actually grew by almost $1 billion. New loans and leases made up $527 million of that for the quarter. Raj will talk more specifically about the way that split up. It was obviously a slow-growth quarter for loans. I will say, at this juncture, much of that growth slid off into the second quarter. And we expect to see a much more robust quarter in the second quarter in terms of growth of loans, specifically both in Florida and in New York. New loans and leases -- I'm sorry, deposit growth outpaced loan growth this quarter for a change, totaling about just under $600 million. And the loan to deposit ratio remained at a little bit under 100% which is where we're comfortable, although we have stated that we will go as high as 110%.

We like to pay a lot of attention to that number and in particular we will be making an announcement later this quarter about a specific deposit program on a national basis, an initiative that we believe will have very strong impact on the velocity of our deposit growth in the coming months. The loan pipeline is very strong, as I mentioned, going into the second quarter. And it is significantly higher than we saw this quarter. Loan pricing remains very competitive in all our markets, Florida and New York. We're being more selective about pricing this quarter. As you can see, we did see a marginal increase in yields on new loan production and on new loan portfolio overall for the quarter.

The growth or lack of growth, in the quarter was impacted by several large payoffs, our own selectivity in pricing and seasonal trends for that first quarter which tend to be weak in both of these markets. Credit trends fortunately continue to remain very favorable. We're not seeing a trend of deterioration in underwriting standards or credit quality in our portfolio or among our peers, outside of energy, at this point. And all indications are that that will continue on for the balance of the year. Loan growth for the quarter came mostly from the national platforms in New York. But that will be different in the second quarter, since the Florida numbers already coming in this quarter looking very, very strong.

So, having given you that update, let's turn to Raj to get a little more detail.

Raj Singh

Thanks, John. I'm going to talk about a number of things, deposits, the taxi portfolio, the investments and so on. But let me start by saying historically we have focused on balance sheet growth. But balance sheet growth drives margin growth. Margin growth drives earnings growth. And also historically we've always been a capital-rich company with lots of capital and only in the last few months have we become capital constrained. As we've become more and more capital constrained, we have been doing a lot more detailed work on exactly risk-adjusted return on capital, on various loan categories and trying to appropriately allocate capital to the highest-return businesses.

In this analysis we've always left securities out, saying securities have been really our -- it's really there for liquidity purposes, not really focused on it as a source of earnings. But increasingly, as loan competition remains heated and that there's a long term disruption in the bond market, we've been seeing that risk-adjusted return on capital in the securities portfolio very often than not is as good, if not better, than loans. So we've been opportunistic.

This quarter, we bought almost $0.5 billion in bonds, mostly HECMs, Ginnie Mae bonds and some munis. And we're very happy with putting on these interest-earning assets which are performing as well and sometimes even better than our loans. So you'll hear us talk about this more and more, especially if the opportunities in the bond market remain as strong as they have been over the last quarter; in fact, I would say the last two or three quarters. Talking about deposits, deposits grew by about $576 million this quarter. That growth really came out of Florida. New York actually had runoff for the first time this quarter. We expect that trend to reverse itself. We had a couple of large accounts that ran off. Loan growth was actually a little higher.

Deposit growth was higher than loan growth for the first time and we were happy about that which left our loan to deposit ratio pretty stable and still under 100%. Cost of deposits moved up about 1 basis point from 62 to 63 basis points and we expect that trend to be good for the rest of the year, stable to maybe increasing just very slightly. On the taxi portfolio, I give you an update every quarter. So last quarter we were at $212 million in outstanding. We're down to $205 million. Most of that reduction came because of paydowns and payoffs; a little bit of amortization as well, but mostly payoff and paydowns.

While the portfolio is small and getting smaller, it's less than 1% of our total footing, so it's still a portfolio that we pay a lot of attention to because of all the factors we've talked about in the past. TDRs have started, as we had said in the last couple of calls. And Leslie will talk and give you some more numbers around how many TDRs we booked in this portfolio. That delinquency has gone up from $7.9 million at the end of 12/31 to $13.3 million. And we have also increased the reserve slightly based on the characters. But there has not been much -- many meaningful change in the credit outlook of this portfolio, but I'll let Leslie talk about the detailed numbers. Les?

Leslie Lunak

Okay. Thanks, Raj. To echo what John said, we had a solid quarter from an earnings perspective, net income of $54.9 million or $0.51 per diluted share. As expected, pressure on the net interest margin continued. NIM declined to 3.83% this quarter. A couple of things driving that, one, as has historically been the case, the fact that new loans are comprising an increasing percentage of the portfolio as compared to covered loans; and also a full quarter's impact of the cost of the senior debt that we issued in the fourth quarter of 2015 which did have an impact on the NIM. Cost of interest-bearing liabilities was 95 basis points from the quarter, up from 89 for the immediately preceding quarter and 82 for the comparable quarter the prior year.

The primary driver of that increase over the prior quarter was the senior notes that we issued in Q4. The decline in the provisions for loan losses this quarter as compared either to the comparable quarter of the prior year or two the immediately preceding quarter, relates primarily just to the lower loan growth for this quarter, nothing else really meaningful going on in there. Reserves on the taxi portfolio increased slightly to $10.6 million or 5.2% of our exposure, up from just under 5% at 12/31. As expected, as Raj said, we've started to modify these loans as they are coming due and in some cases proactively prior to maturity. So to date, we have modified $18.6 million in taxi loans in TDRs. Most of that was done this quarter and reserves on that portion stand at right around 10%.

We actually saw a decline in noninterest expense this quarter, excluding the indemnification asset amortization from the immediately preceding quarter, although we do continue to expect an increase year-over-year, somewhere probably in the 7% to 9% range. I also want to point out that [indiscernible] in the other income line item, but we did take a $1.5 million fair value adjustment on our MSRs this quarter due to the pickup in prepay speeds. So that's in there as well.

Looking forward to the rest of 2016, not really any significant changes in the guidance that we gave you on the last call, we're still comfortable with our overall projection for the year, with respect to loan growth. We continue to expect some NIM compression. NIM for the year now looks like it's going to land somewhere in the 3.6% to 3.8% range, but obviously that's dependent on what happens in the interest rate environment and what happens to the yield curve. So that could change.

We continue to expect higher earnings in the back half of 2016. Then we see in the front half and an upward trend in reported quarterly EPS, particularly for the second half of the year. Given what we know today, current consensus for the year seems pretty reasonable. We continue to expect the combined yield on the cover loans and indem assets, at least for the near future, to be between 9.5% and 10%. And we're not seeing anything that would lead us to predict material changes in the level of the allowance as a percentage of loans, in the level of nonperforming assets or in the net charge-off rate, as we sit here today.

I'm going to turn it back over to John for any closing remarks.

John Kanas

It's pretty wrapped up [ph] obviously in summary, we remain positive for the balance of 2016. All of us bankers, of course, would like Janet Yellen to reach down into the bottom of the bucket and pull us out a little bit here and help us on the monetary policy. But we're not -- we don't hold out any false hope for that. In fact, our view of that is quite pessimistic, although I think consistent with the forward curve. We're very optimistic about the strength of our primary markets. Things in Florida and New York are continuing to grow in an outstanding fashion.

We're, as I mentioned earlier -- we will announce a deposit initiative starting a little bit later this quarter, with a new team of people that have joined the Company and expect that that will help to balance the loan to deposit ratio over the next few quarters, as the balance sheet continues to grow. So, in summary, a decent quarter on an earnings level, a good quarter earnings level. Were it not for the MSR, I guess we were right on 52. Slow growth, but I would remind you that as we have gone around speaking to many of you around the country, we would urge you and continue to urge you, don't judge us on a quarter-to quarter basis, because these things are unpredictable.

We do know that second quarter will be significantly -- we'll grow significantly more than the first. But looking at beyond that, it gets tougher and tougher to see. But we stick with our original indications for the balance of the year and expect -- we said earlier that we expected 2016 to look a lot like 2015. And so far, so good, that's it.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is open.

Stephen Scouten

Just talking a little bit more about the loan growth, is this something similar to what we saw back in 3Q 2014, where loan growth was a little lighter, but there was a big carryover into the next quarter? Or are there any other issues at play, maybe especially in Florida, given only the $28 million in growth? And maybe digging a little deeper, even any regulatory constraints, given their focus on HVCRE, CRE in general? Anything you can speak to there?

John Kanas

No, this is -- well, there were some very large payoffs in Florida this quarter. But generally speaking, this is -- this quarter was, in fact -- looked an awful lot like a replay of that third quarter of last year, where the volume was made up the next quarter.

Stephen Scouten

Okay. And then maybe in terms of the timing of the incremental capital needs, I know you spoke -- Raj, you spoke to the fact that you are looking more at risk adjusted returns and being more discerning about how you allocate capital, given your more constrained base today. But are you guys thinking about that ending differently or is that still something that looks like later this year? Maybe a preferred raise, something along those lines?

Raj Singh

I think our best guess is still the same which is later this year, probably fourth quarter, just like we did last year. And it will be debt again, in all likeliness. We don't see a preferred anytime this year, probably -- I don't know, two years out, maybe? But, no, the next tranche will be debt again.

Stephen Scouten

Okay. And then, Leslie, maybe one last thing for you, in terms of the indemnification asset amortization, was there anything unusual with that spike? Because it looks like that 9% to 10% math that you normally speak to was elevated. This was higher than that math would have dictated. So anything that is unusual in that $39 million number?

Leslie Lunak

So, two points, Stephen. We will still be in that 9.5% -- it does still fall in that 9.5% to 10% range for the quarter. I think it's a little bit higher, actually, than that in the fourth quarter of 2015. But really that's just driven by updates that we made to our cash flow forecasting model in the fourth quarter and the -- and we update that every quarter. And we had some tweaks this quarter to some of the assumptions in that modeling that drove a little bit accelerated amortization. However, no change overall in the total amount of accretable yields, so it's just really a timing thing.

Operator

Our next question comes from the line of Dave Rochester with Deutsche Bank. Your line is open.

Dave Rochester

With the opportunities that you are seeing to grow deposits this year and the new team you've got coming on, you are you thinking you can fund that loan growth that you are expecting, that $4.5 billion to $5 billion, entirely with deposits at this point? How should we think about that?

Raj Singh

That's our goal. The team that is coming on will come on this quarter. I don't like to count my chickens too early, but we have very high expectations. Certainly next year, our expectation is for 2017 that we will be dollar-for-dollar funded with deposits and might be even more than that.

Dave Rochester

And then just switching to your strategy on securities, we should expect at this point to see some continued growth there this year or at least it sounds like maybe this quarter, given the opportunities you're seeing. Is that fair?

Raj Singh

Yes, that's fair.

Dave Rochester

And if loan growth ultimately outstrips deposit growth, nearer term, before the team gets ramped up, are you just thinking you'll fund that with borrowings nearer term and expect to run those off later on?

Raj Singh

Yes, we have plenty of capacity to borrow if we have to.

Leslie Lunak

Yes.

Raj Singh

So we're not worried about liquidity from that perspective.

Dave Rochester

Okay. And just one last one, can you just talk about the dynamics you are seeing in the multifamily and commercial real estate markets in New York City? I think you had mentioned on month or so ago you were seeing some smaller competitors back away from the space. Are you still seeing that, a more rational market, I guess you could say? And how is that benefiting you?

John Kanas

There hasn't been much change, David, in that area. The big competitors there are New York Community and Signature and us. The small players come in and out. They will be aggressive for a couple of months and then back away. So, generally speaking not a lot of change.

Operator

Our next question comes from the line of Steven Alexopoulos with JPMorgan. Your line is open.

Steven Alexopoulos

Could you guys actually share what the level of loan paydowns was in the quarter? And how does that compare to where you had been running?

Leslie Lunak

Steve, I don't have the exact numbers in front of me, but we did have significantly more paydowns this quarter than we have experienced in prior quarters.

Steven Alexopoulos

Okay. Leslie, is it your broad sense that ex- the paydowns, loan growth would have been more typical this quarter? Or was there something else also weighing on quarterly growth?

Leslie Lunak

I don't think paydowns account for all of that, Steve. I think we also just had some normal seasonal slowness; as John mentioned, a little more selectivity around pricing. But that was certainly a factor, particularly in Florida.

John Kanas

I think the other part of that answer will come in the second quarter, Steve.

Leslie Lunak

Yes.

Steven Alexopoulos

Okay. Raj indicated that you were finding securities attractive. Has your appetite for lending pulled back at all, just given what the yield curve has done?

John Kanas

Well, I will say this, that we're being selective, that we're finding that in certain markets for certain products we see some irrational pricing and we will not make loans at irrational prices. So, are we being more selective? Yes. Is the market big enough to give us the growth that we expect this year, even with our enhanced requirements? Yes. So, we're just -- we don't want to play at the bottom of the barrel here. We want to make sure that we get paid for risk.

Raj Singh

Steve, I'll add to that. The disruption in the bond market gives us the ability to be more selective in the loan market, if you know what I mean.

Steven Alexopoulos

And I know the deposit initiative announcement is still coming, but do you guys have a sense of the cost of those deposits, relative to where you had been raising? Is it relatively similar?

Raj Singh

Again, I'll make a long term prediction, not a short -- not for this year; but next year, I expect that cost of funds to be lower than where we're in New York or in Florida.

John Kanas

But it will take between now and next year for that to happen.

Raj Singh

Right. I'm sure the first few deposits that are booked might be at a slightly higher rate just to get the team started. But long term, this particular business should have a lower cost of deposits than our cost of deposits right now.

Steven Alexopoulos

Okay. And then just one final question, the credit overall obviously remains very good. Is there any pressure to speak of at all on the rail portfolio?

Leslie Lunak

Obviously, we have said in the past that there is some energy exposure there and that is definitely true. To date, we have not experienced any assets coming off lease or any impairment in our residual values on that portfolio. However, there are a handful of leases for which there is some risk of that materializing in the future, if oil prices remain depressed.

John Kanas

We watch that very carefully, wouldn't be surprised to see a little pressure in the portfolio over time, but not seeing anything significant yet.

Operator

Our next question comes from the line of David Eads with UBS. Your line is open.

David Eads

Maybe on the hiring outlook, you've talked about this deposit team. Can you give a little color on what you are seeing from the hiring outlook in other parts of the business?

Raj Singh

We've been focused this year on bringing in deposit generators. So, not that we've done much hiring, but whatever little we've done, it's been really on the deposit side because we want to eventually grow our loans dollar-for-dollar with deposits. So, that has been the focus for the first three, four months, this year. We haven't really done much on the lending side, maybe a little bit, have not much, maybe in Florida, one or two.

And the national businesses, we haven't really done much. The market is still very much there if you want to bring on producers. Generally when we bring on good people, there is more people who want to follow them. But we look at our hiring needs selectively. We always said in the last year or so, we've been saying we don't really have any big boxes to fill. If there is a producer with a book of business, we'll look at them. But we're not out with big mandates with headhunters trying to recruit people. It's more opportunistic in nature.

David Eads

And then there's been a lot of talk about the regulatory guidance around CRE. And I'm just curious, does that impact your thought process in terms of whether you would be willing to go over the 300% concentration guideline in any way?

Raj Singh

We're currently under 300%, but we're approaching 300%. And the way we're growing our loan book, we will probably go over 300%. The guidelines are that if you do go over 300%, the risk framework that is needed before you go over 300% is far more robust and detailed than if you remain under 300%. So we're working furiously to develop and implement that risk framework that is needed to be over 300%. So, at probably sometime this year or into next year, we will reach the 300% level.

David Eads

And all the expenses associated with that would already be in the expense guidance, do you think?

Leslie Lunak

Yes.

Raj Singh

The money is being spent as we speak.

Leslie Lunak

Q1 expenses.

John Kanas

By the way, that's an OCC guideline. And as I'm sure I don't have to remind you, most of the other banks that are not OCC, many of the other banks that are not OCC that are particularly our size, operate with far more than 300% of their capital in commercial real estate.

Operator

Our next question comes from the line of Ken Zerbe with Morgan Stanley. Your line is open.

Ken Zerbe

Just on that deposit platform, I understand that you're not fully in position to talk a lot of details about it. But the process, the mechanics, the platform itself I think you mentioned hiring a team to do this. But is this like, I don't know, like an Internet-based platform? Is it people, platforms? Trying to get a better sense of the cost of the platform itself.

Raj Singh

Yes, it's a people-based platform. It is not an Internet platform. We're not becoming Ally Bank, if that's what you mean. If it was retail, the cost would be a lot higher, as you can imagine. So, the cost of funds is expected to be better than our current cost of deposits tells you that this is more commercial in nature. It's more people-intensive rather than technology-intensive.

There is a technology element to it, too, by the way, because there are very unique products that we're developing which are needed to be in this space. We have done this business that we're talking about so particularly here for the last couple of years out of Florida, but we have never been very organized about this. And we're trying to take this business in some way and institutionalize it and actually grow it more systematically and it will be national in nature.

Ken Zerbe

So, for lack of a better word, it's sort of a deposit-gathering team that you are hiring.

Raj Singh

Yes. It's special products, treasury management products for this team. So it's not just a team coming in with a book of business; we're coming up with special products to target certain industries which lets us earn the low cost of funds.

Ken Zerbe

Okay. And then the other question, just on the FDIC amortization. So, call it roughly $40 million this quarter. Just to be super clear, the 9.5% to 10% net-net yield, that includes everything from the $40 million of amortization and the benefit on the net interest income?

Leslie Lunak

Yes.

Ken Zerbe

Okay, so that's a yes there. But going forward, just from a modeling perspective, does this stay at roughly $40 million? I know eventually it trails off over time.

Leslie Lunak

When you figure it out, tell me.

Ken Zerbe

Okay, will do.

Leslie Lunak

I'm just kidding. All else held equal, as you know, we re-forecast these cash flows every quarter. So barring a significant improvement or a significant deterioration in forecasted cash flows, it will trend down over time because the balance of the asset will decline, so amortization will decline, all else held equal. So our current expectation is that it trends down from here but that's updating cash flows every quarter.

Ken Zerbe

But that increase of $7 million this quarter in amortization is also reflected in a, quote, $7 million increase in NII. Is that fair?

Leslie Lunak

Actually, why don't you call me about that, Ken?

Operator

Our next question comes from the line of Lana Chan with BMO Capital Markets. Your line is open.

Lana Chan

I don't know if you mentioned it, but what were the new securities purchased yields that you bought?

Raj Singh

They are not disclosed. What I did say in my comments were they were mostly HECMs and some munis. So, that was the vast majority of the $500 million or so that we purchased.

Lana Chan

Okay. And can't let you get away with a conference call, John, without talking about M&A. Any updated thoughts about the environment right now?

John Kanas

M&A, M&A, let me think. What does that mean? No. We continue to have conversations, as I think most banks our size are. There is certainly a heightened level of conversation among and between banks, as we struggle along here with this flat yield curve and people begin to assess where they are going over time. We have not identified anything as yet that makes a great deal of sense to us. Remember that we're not anxious to dive headlong into the $50 billion pool which is where we'd go if we did a decent-sized deal. That's not to say we wouldn't do that, but the economics would have to be compelling to get us to do that. To do something smaller, while it's not out of the question, it would have to be something that would also be compelling.

Remember, we run around saying we should buy what we can't build and this thing certainly has a lot of room to run in terms of its ability to build itself organically. So, I would say, in summary, not much. We're aware of dozens of conversations between people, between us and others and others and others. But I think that the deals that were announced early in the year spooked the market. The buyers got hit pretty hard on the tangible book value dilution and so people are sitting back being a little bit more cautious. Regulators aren't neutral about this. And certainly, to my knowledge -- standing in the way of a sensible amalgamation but it's harder and harder to make sense of some of these deals.

Lana Chan

And just one quick question for Leslie, the 3.60% to 3.80% margin for the year, does that include any rate hikes?

Leslie Lunak

So, it's based on the consensus forward curve as of February, probability weighted. So probably there's one in there. There were two earlier; now there's probably one in there.

Operator

Our next question comes from the line of Brian Horey with Aurelian Management. Your line is open.

Brian Horey

Last quarter, you gave us some details on the portion of the taxi portfolio that was substandard. And I think in the past, you have given some debt service coverage ratio stats on the portfolio. Can you update those?

Leslie Lunak

So, nothing has really changed materially on the debt service coverage front. A few more of the loans did move to substandard because of the TDRs, particularly the ones that were restructured. A lot of those were reclassified. I think now we've got about $88 million in substandard which is up a little bit from last quarter. But the debt service coverage picture has not really changed materially.

Operator

Our next question comes from the line of Jared Shaw with Wells Fargo. Your line is open.

Jared Shaw

Just to follow up on the loan growth, the original expectation of $4.5 billion to $5 billion for 2016, should we be thinking that that comes in evenly now over the remaining three quarters? Or will we see a catch-up? Is that pipeline, in second quarter, going to be big enough to catch-up the shortfall from this quarter?

Raj Singh

I think it's safe to say that quarters will never be even. They will be choppy. There will be a big quarters and small quarters. Last quarter, we had growth. Fourth quarter we had $1.4 billion, I think, if I remember well?

John Kanas

Yes.

Raj Singh

This quarter, we've had less than $600 million. So, expect a lot of big and small quarters. Overall we still feel good about the guidance we gave you in the first quarter, but I wouldn't say it's going to be smooth.

Jared Shaw

Okay. And then as we look at the mix, where the portfolio looks like as a mix at the end of the year, still similar to where we're today? Or will that multifamily and commercial real estate be less important as it is today or roughly the same?

Raj Singh

I think it will probably be the same. It's not going to change that much. It takes a lot to move the entire portfolio. Mix doesn't change that quickly in six or nine months, so I think the mix will roughly be the same.

Operator

Our next question comes from the line of Brody Preston with Piper Jaffray. Your line is open.

Matt Kelley

Just to follow up on the conversation about the 300% commercial real estate limit. And you have a pretty big difference between how the regulators view that, between the estate the regulators and the OCC. Do you see that gap between the view on regulatory risk and concentration risk closing over the coming years? Or any kind of streamlining in those regulations between those two bodies?

Raj Singh

We talk to OCC about this all the time, because we feel that this is a competitive disadvantage to us. And what we hear from them, both publicly and privately is that over time it is OCC's expectation that all agencies, the FDIC and the Fed will also move closer to their position on this 300% guidance. What is the timing of that? When it will happen; in what way, shape or form? I'm not the right person to answer that. I hope it happens sooner rather than later, because then it will be a level playing field. This guidance has been out from the OCC for probably 10 years, if not more, so it's been around for a long time. But in the last year or so, we've been hearing more that there's more dialogue between the various agencies to get to the same place of 300%. So, hopefully over the next few quarters, we'll see that.

John Kanas

No question, it represents a competitive disadvantage for OCC banks, particularly if you look at the companies that we compete against in New York, where there's a huge amount of these kind of loans available. Most of the competitors that we deal with up there are not under this regulation.

Leslie Lunak

It's interesting that the guidance is purportedly interagency guidance.

John Kanas

Right.

Matt Kelley

And then as you prepare to go through, maybe just talk about that process, what you have to do internally to get ready -- systems, underwriting, data management and what kind of cost is that?

Leslie Lunak

It's not systems, what we need to do is primarily expanded and more detailed and intricate management information reporting. So we're in the process of putting all of that in place right now. And it does not involve a big systems investment. It involves more of an effort around reporting and data aggregation and slicing and dicing things in more ways, more detailed information about the portfolio, generally speaking.

Raj Singh

Internal reporting.

John Kanas

Internal reporting, yes.

Leslie Lunak

More stress testing.

John Kanas

More stress testing, yes.

Operator

Our next question comes from the line of Gerard Cassidy with RBC. Your line is open.

John Kanas

I want to finish this one thing. I would remind you that that is an interagency guideline, that 300%. Right now, it's only being applied to the OCC to the OCC banks, but it is an interagency guideline. So, stay tuned to that. Sorry, go ahead, Gerard.

Gerard Cassidy

You guys just need to get Bernie Sanders to talk about that. He wants to break up Wall Street; he should talk about this, too. That'll get it going.

John Kanas

I don't think he's referring to us.

Gerard Cassidy

There you go. Leslie, I had a couple questions for you. You mentioned the TDRs in the taxi portfolio. Are there any other TDRs in the total portfolio or is that it?

Leslie Lunak

There's a couple, Gerard, but nothing significant at all.

Gerard Cassidy

Okay. Obviously you guys have the Small Business Administration business now and it's over a year old. How much were the gains in the quarter, if there were any, in the other noninterest income line that may be attributed to--

Leslie Lunak

About $2 million, Gerard for the quarter.

Gerard Cassidy

Pardon me?

Leslie Lunak

About $2 million for the quarter.

Gerard Cassidy

Okay. And as you see the growth in that portfolio accelerate, any idea how large those gains could get, going forward?

Raj Singh

Gerard, it hasn't been a year yet with that business, so we're not trying to do anything miraculous here. We will have growth this year over last year, but it's not going to be some order of magnitude growth. So I don't think it will be that meaningful to our bottom line in terms of any change.

Gerard Cassidy

And then on the residential mortgages that you purchased this quarter, was it a diversified mix around the country? And were many of them jumbos or were they conforming?

Raj Singh

Almost all jumbos, we generally buy jumbos only. And they are all over the country, in the usual jumbo locations, as you can imagine, right? And we're a 5171 [ph] player; and from time to time, we will buy some 15 years as well, because we like the credit metrics of 15-year paper--

Gerard Cassidy

And Raj, what's the typical loan to value on those types of loans that you are seeing?

Raj Singh

Gerard, I don't have the exact number, but it's been in the 60s, yes.

Leslie Lunak

Yes, low 60s.

John Kanas

Low 60s.

Gerard Cassidy

Yes, good. And then just one follow-up, Leslie, I think you touched on the rail portfolio, that you might -- you have some softness in there, of course. And you said you wouldn't be surprised if some of that came to the front line. When do you think that could happen -- this year, where there could be some issues with it? Or is it next year or the year after?

Leslie Lunak

Probably next year, Gerard, before we see any impact on the financials, although it's hard to say with certainty. The most likely way for that to manifest itself is to be a reduced rental income stream, if some of the cars -- if we have to do some restructuring or something like that, but nothing is in the works at the moment.

Gerard Cassidy

Okay. And then finally, Raj, you talked about the risk framework. I know you answered the question about what you would have to do for the management reporting systems and stuff for the 300%, when you go over that level. Is there any capital issues, in addition to the internal reporting, that would have to be addressed? Or is it primarily internal reporting when you reference risk framework?

Raj Singh

Really it's about portfolio management, internal MIS, management reporting and Board reporting. That's really what it is. It's doing a lot more, a more detailed analysis of the credit risk, yes. So, it's a lot of internal work that we have to do and we've been at it for a few months now. And we have milestones coming up over the next few months which we expect to do all of that work sometime during this year.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to John Kanas for closing remarks.

John Kanas

Thanks, everybody. Look forward to talking to you in 90 days. And hopefully by then, we'll get some help from Janet Yellen. But short of that, we will continue to plug on here. So, we will be out on the road I guess several times during this quarter, making presentations and talking to you in more detail about what we see happening in these markets and in this Company and look forward to meeting you in person again. Take care. Thanks.

Raj Singh

Bye.

Leslie Lunak

Bye.

Operator

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

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