Ladies and gentlemen, thank you for standing by, and welcome to the BankUnited, Inc. Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Susan Greenfield, Corporate Secretary. Please go ahead, ma'am.

Thank you, Josh. Good morning and thank you for joining us today on our second quarter results conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain 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. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries around 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, including, without limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-19 pandemic. 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, 2019, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website, www.sec.gov. With that, I'd like to turn the call over to Raj.

Thank you, Susan. Welcome, everyone, to our earnings call. Thanks for giving us your time. Let me make a few comments about the environment before we get into the quarter. Three months make a big difference. This is not a traditional economic downturn. It's not caused by anything other than the virus. It is still a very serious situation, but we feel a lot better today than we did 90 days ago. There have been some encouraging signs in the economy over the last 3 months, whether it's employment data from May and June, or retail sales, or home sales or capital markets generally, but there is still a lot of uncertainty. Unemployment is still very high. There are mixed signals about certain sectors in CRE. The virus, obviously, is still not tamed, and there are a number of states that are reporting high levels, including Florida. The impact of all of this, then it gets further compounded by the fact that we are 100 days away from election. And the political scenario in the country will make it even harder to read when the economy is headed in the next 100 days and beyond. But overall, we are much more optimistic today, but I would still say we are cautiously optimistic than we were 3 months ago. When all this started, we started having Board meetings. Early on, it was actually on a weekly basis to inform our Board, but then eventually every 2 weeks. And in one of the early Board meetings, a question was brought up, which I want to share with the shareholders, which was about how are we going to deal with this crisis and, over the course of the next year or so? And what are the principles around which we will react to…

Great, Raj, thank you. So just to amplify some of the comments Raj made earlier. Excellent quarter overall for deposit growth. Total deposits were up $1.1 billion for the quarter. And as Raj mentioned, noninterest DDA actually grew by $1.3 billion. So looking into those numbers a little bit. While it's difficult to be exact about this, as we finished the quarter, we estimated that we had somewhere between $400 million to $600 million of noninterest DDA on the balance sheet that was related to the PPP loan proceeds that were still residing in the operating accounts of the clients. Remember, we funded a little bit over $800 million. So while that was a part of the growth, we still saw a strong overall growth in NI DDA across all geographies and business lines, and a significant portion of our deposit growth this quarter actually came from new client relationships. We had over 700 new business relationships generated over the quarter. And remember that this was a very different quarter for us in terms of generating business in a remote environment. We were learning how to do that. I think we did a really great job of it. We had close to $500 million in deposit growth that came out of those 700 business relationships. Again, each line of business contributed to that significantly. With this growth and our liquidity position, we were able to let some higher cost deposits run off during the quarter. Total time deposits actually declined by $811 million in the quarter as we reduced our CD rates. We do believe that some of that money moved into the money market product. As Raj mentioned, we continue to very systematically reduce our deposit cost. The spot rate on total deposits declined by 47 basis points for…

Morning, everybody. Before I dive in, I'm just going to, we're not really doing a walk-through of our deck today with you, but we did put a supplemental deck out there for you to update a lot of the information that we had given you at the end of the first quarter, so it's there for reference. And so now diving into CECL and the allowance for credit losses. There are a lot of moving parts to the reserve estimate for the quarter, and I'll try to walk you through the more significant ones. So for your later reading pleasure, Slide 15 in our supplemental deck walks through the changes to the reserve by major portfolio segment. You can look there as I'm talking if you want to. But let me speak first to the economic forecast assumptions. So the loss estimate is impacted by the economic, by economic factors in two different ways; one is it takes into account economic conditions as they existed at the balance sheet date, which were significantly worse at June 30th compared to the model inputs at the prior quarter end. The second way is the forward path of the economic forecast, which was, in some respects, worse and in others better compared to the March 31st forecast. And one thing to note here is that at June 30th, unlike at March 31st, the worst point of the forecasted trajectory of the economy was behind us, whereas at March 31st, it was in front of us. To give you a few high-level data points. The forecast for this quarter incorporated unemployment starting at 13.4%, declining to 9% by the end of 2020 and to 7% by the end of 2021. Annualized GDP growth started at a negative 27%, recovers pretty significantly in Q3 and…

Thank you, Leslie. The problem with transparency and providing you a lot of information is that these calls take forever. So sorry for taking so much of your time, but we'll open it up for Q&A.

[Operator Instructions] Our first question comes from Stephen Scouten with Piper Sandler.

I'm curious, maybe first, on the expense run rate. I mean, a really impressive quarter-over-quarter change there. I know your guidance kind of previously, which, obviously, no one could be too specific, but it was just for expenses to be down year-over-year. So wondering if you could dig deeper into the salaries, migrations and what really caused that, if it was FTE reductions or more just the things you noted in the release? And then just lastly, if there was a FAS 91 impact within salaries as well.

Yes. So I think the salary reduction, the most significant component of that, Stephen, is, in fact, FTE reductions year-over-year. There's a little bit of an element of that, as I mentioned in my remarks, that's reduced variable compensation. As to the FAS 91. If you look at Q2 compared to Q1, yes, there were a little bit more FAS 91 costs deferred in Q2 because of PPP. However, year-over-year, that actually went the other way. There was significantly more FAS 91 deferrals in '19 than in '20 because loan growth was higher in '19. And I don't have, I'm sorry, I don't have those exact numbers in front of me.

No, that's okay. That's, yes. No, that's really helpful. Okay. And maybe just the one other question really I have is, so you guys gave a ton of detail on the migrations and the movements in the loan loss reserve, which is extremely helpful. But I guess maybe generically, how would you respond to kind of maybe a feeling if somebody looked at your reserve on a stand-alone basis, call it, the 1 27 without the PPP and the mortgage warehouse, the debt on an absolute basis, may look below peers. Would you just kind of highlight, I guess, all that you already said and say that you believe the risk rating changes are the lagging indicator? Or how can you maybe frame that up for us?

I think you have to take into account the portfolio mix. So when you compare bank a to bank b, there's often a very big difference in portfolio mix. We have a big resi portfolio. We have other large portfolios that are not really impacted by this. So the municipal portfolio is hardly reserve or against that. That's 1.5 billion. So if you normalize for those things, then you will, that explains it more than anything else. We've always said our portfolio was never really created for high yield. It doesn't have the high-yield components. In other words, it doesn't have the high-risk components, which is why you see that difference. If we had a couple of billion dollars of construction loans or some other leverage loans, a couple of billion of that, you would see a much higher reserve.

Yes. I would echo that. I think it's largely reflective of what we believe to be the quality of the portfolio. And Stephen, yes, I do think the risk rating migration is a lagging indicator. I think the risk rating distribution at 6 30 is much more reflective of where the, I think the reserve at 3/31, a quarter ago, was more reflective of the current risk rating distribution than of the risk rating distribution at that date. It's kind of catching up.

Our next question comes from Brady Gailey with KBW.

So if you look at the BankUnited 2.0 plan, I mean, clearly, you're coming ahead of where you thought you'd be on the expense side. I think you said you're at, you're already at $47 million versus, I think, the initial estimate was around $40 million. How much better do you think you can do on the expense side? It feels like the world has changed, and there's probably some more branches. And maybe people that weren't planned back when BKU was initially focused on.

Yes. Brady, we have not gone back and majorly redone the initiatives to say, okay, let's take a second look at this and a 3.0, for lack of a better word. We haven't done that because the last two, three months have been rather sort of moving focus tactically on everything PPP and everything else that we're doing in this environment. But we will take a look at it, as the business model changes, as customer behavior changes, if there is an opportunity to look for more stuff, branches is a simple example of that, we are going to look at that. But that's not going to happen in the next quarter or two. That those will be longer-term because any decisions you make that are meaningful do take a year or two to really not to analyze but to operationalize, right? If we decide there's one more bank we could close, if you decide today, you're not going to see the impact of that for at least a year, if not longer.

Okay. And then looking at the cost of funds or the cost of deposits, I mean, it's a nice reduction there. But the cost of deposits is still 80 basis points, which it feels like there's definitely room to move that lower. How low do you think you can get the cost of deposits in this kind of 0 interest rate environment?

Well, we're kind of showing you a little bit of what it's already looking like by telling you at June 30, it was down to 65 already, right? It was 80 for the quarter, but at a point in time, in June 30, it was 65. And it's already down from there in the first 3 weeks of July. I think we bottomed out in the high 50 basis points. Last time Fed was at 0. We're pretty confident that we will go well past that. Now do we get, do we bottom out in the 40s or the 30s? It's really hard to say. What we are focused on is basically bringing in operating accounts. And that actually, more than anything else, more than any of the highlight numbers, that's really the driver of long-term value. And we're having a lot of success. PPP was a gift as painful as it wants to go through it. And, but looking back at it, it was such a big gift. And the reason it was a big gift is a lot of big banks really, really kicked off their clients. And that has given an opportunity for us to go in. Even though we didn't do their PPP loans, but if you were not treated well by a bank in April, and even if you got a PPP loan eventually, but you have to go through a month of not knowing whether you'll get the money or not and not getting phone calls returned, that creates an opportunity for banks like us. And we're already capturing that. All the numbers you see here, some of the growth that we've gotten is because of that. And the pipeline, as Tom said, is robust. It's because of that. So that will be a gift that will keep giving for the next few months into next year.

Our next question comes from Jared Shaw with Wells Fargo.

Just wanted to circle back on the allowance and credit. First, I guess, on the deferrals. What percentage of the portfolio has already gone through that first 90 days? So I see we were down to 4%, but is that 4% a good indicative level of the whole thing, or that's just where we are right now?

Yes. Most of the first run deferrals happened in a 3-week period which was last week of March and the first 2 weeks of April. So here we are sitting at the end of July. So I don't have the exact numbers, but I'd say a pretty large majority has already hit the 90-day window. And remember, they start talking to us about asking for another deferral, not on the last day, those conversations generally start at sort of a 2-month to 2.5-month period. So we feel that we have fielded a lot or most of what has to come in terms of re-deferrals, but there may be still some that trickle in. But a majority of, and what we're showing you is actually not approved deferrals. What we're showing you with these readable rates are the requests because they are still, some of them are still in process. And not every one of them will be granted. Most of them will be granted, but some may not be granted. We're showing you the request that have come in. So that's actually a larger number than what will actually get processed.

Got it. Okay. And then just looking at the allowance and the provision level. I'm looking at Slide 14, where you have the reduction in allowance of 8.4% from the economic forecast. That's definitely not what we've seen with the other banks. And I haven't really heard other banks focus on the VIX and the S&P. And when I look at like the baseline, you will use GDP expectation for 2021 from March to June, it's actually gotten worse. So I guess, was there a change in methodology from first quarter to second quarter on CECL or...

No, no.

Can you just give a little more color on that broader economic deal?

Yes. I would actually just flip to Slide 15, which I think is going to answer your question better than Slide 14 because it really breaks it down. Like in my remarks, I kind of said it's a tale of 3 cities. And you can see that the impacts were very different in the CRE portfolio than in the C&I portfolio, where the economic forecast really was punitive to the CRE portfolio. I don't, I can't speak to what other banks are doing or what models they're using, but I can say that the model that we use for our C&I portfolio, which is one of the suite of Moody's models, is very sensitive to the VIX and the S&P. I know a lot of other banks aren't talking about that. Maybe they don't have a lot of those types of loans in their portfolio that would run through that model. I can't speak to that. But that's really what's driving it. So no, there's no change in methodology whatsoever. Those particular economic variables in the June forecast actually improved compared to the March forecast.

Our next question comes from Steven Alexopoulos with JPMorgan.

Before I start, I just have to say your credit-related disclosures, both the slide deck and on this call are really top notch. I think the best I've seen in the industry, so thank you for that. To follow up on Jared's questioning, I tell you, I think we're all staring at the Slide 15 and looking at the reduction tied to the economic forecast in C&I and scratching our heads saying, how would the market volatility in the S&P 500 impact BankUnited's credit quality on C&I? It just doesn't seem to make sense to us.

Well, so it's a correlation. I can tell you the Moody's thousand page white paper on the risk count model, but you probably don't have time to read that. But what Moody's has determined is that with middle-market C&I modeling, that those are the two factors that are most highly correlated to perform, to credit performance. I think there's probably a whole lot of complicated math behind that, that may be over my head in some respects. But those are the factors that Moody's has determined are most, is from their credit research database with millions upon millions upon millions of observations, and these are the factors that they've determined that losses for those types of loans are most highly correlated to. Mathematically, that's how I answer your question. But to take a step back from that, I will tell you that we feel really good about where the reserve is sitting on our particular C&I book right now. We think it's in the right place. We know what's in that book, we know the quality of those borrowers, we understand their businesses, we understand their performance and their financial condition. We've spent a lot of time understanding how they're being impacted by the pandemic and we really feel like the reserve on that particular portfolio segment is right where it needs to be. And I think that's the more important thing than trying to have, we can have a long conversation about the math and the Moody's models, but I think that's really the more important observation, Stephen.

So I think the 1% deferral rate is a fact...

Supports that.

Support that.

Yes.

There's another mechanical factor, which also went in, which is we have made assumptions around prepayments at the end of March, which were a little too draconian. We have assumed that like it generally happens during recession that prepayments would come to a grinding hold, and there would be no prepayments for the rest of this year. Now we look back at the last 3 months, if anything, prepayments actually picked up. So it applies us. That's usually not what happens. But we have to then react to the actual data as it's coming out, and we're seeing prepayments across all asset classes, by the way, not just one, that are at least as much as they were before. In some cases, are actually higher. So these models are also sensitive to prepayment assumptions, which, like I said, we had to dial back to more realistic numbers than the draconian ones we yield in March.

And I'll also remind you that we did spend a lot of time in the month of June reaching out to our individual borrowers to find out not as of December 31 or as of March 31, but today, how is your business performing? What do your revenues look like? What do you, and all of those observations at the loan level informed our reserve estimate. So we feel very good about the C&I portfolio and the current reserve levels.

Okay. That's fair. If I could just follow-up, too, on BankUnited 2.0 and looking at the $47 million of expense reductions so far, which is obviously better than expected. Maybe one, where are you coming in better than expected? And two, are there, have you now realized all of the cost saves, or are there still more to come as part of that plan?

I would say a lot of it is comp and, a lot of its comps, Steven, just because that's the biggest expense line on the P&L. I mean, if you're going to save money, you're going to have to save in comps because that's where the dollars are. So that's where most of it is. We've had some of it, obviously, and the real estate spend has come down. Some of our technology spend, some of the things we've done, some of the investments we've made in technology are actually reducing our operating cost levels. So it's all of that. As to future opportunities, I'll echo what Raj said. I think there are future opportunities, but you're going to see them not all next quarter because they would be predicated on decisions that we would make about the real estate footprint, some things that are still to come in the technology areas and things that I still think are to come in the vendor spend area. But all of those are going to take time to materialize and really have an impact on the bottom line.

Yes. Steven, I do want to make a point here. Please do not think that this is coming from starting the franchise from investments that we also are making as part of 2.0. So the number of $40 million is a net number. There is stuff that we're investing in, which will pay dividends in the years out. It's not like we've decided, let's just not do those things. So those, because on one hand, we have to tactically fight the fire. But at the same time, we have to keep building the franchise, and you cannot just keep fighting the fire and then have no franchise 2 years down the road. So those investments are still going, moving forward because once you make a decision on making investments, it may take 2 years to do it. And you don't stop in the middle, but that does a lot of damage. Make you feel good for a quarter or 2, but you really is the wrong thing to do. So those investments are happening. Like I said, the automated underwriting on the small business front, that was a good investment. It took a year of technology spend and training and hiring people, all of that, we haven't made a single loan on that. It will go live. Unfortunately, it's about 3 or 4 months later than we had originally wanted it to be. But we are going to move forward. That's the direction we're going in. In fact, PPP was a nice little test for us. We have to do automated underwriting on a very high level for PPP. And we learned a lot from that, and we're using it to invest in that platform. And we will launch it. Like I said, maybe 3-, 4-month delay, but we're not pulling back. That's not where the dollars are coming from. Some of it is, to be very honest, when we tell you $40 million, we internally are shooting for a higher number, as you would expect us to do, right? And it just becomes easier to achieve that when everything is locked down and people are generally, become a lot more sensitive to expenses. So it's a little easier to achieve.

Okay. And maybe just one final one for Tom. You talked about all these commercial relationships that you're moving over to the bank. I think Leslie made the comment that we didn't expect anybody to prepay a loan in the middle of a pandemic. I wouldn't expect many commercial customers to move their account in the middle of a pandemic either, but you're doing it. Maybe give us some color on how you're, I mean, are these moving over Zoom meetings? Like how are you moving all these relationships over?

They are Zoom-meeting driven. As I said, when I made my comments, we're learning how to sell...

And I do think Tom has been [indiscernible].

Maybe I'll admit to that. No. But as Raj said, the PPP process, it's not all of it, but it, I think how successfully we executed that. And also compared to where others failed, we have picked up new relationships that have been with other major banks for 30, 40, 50. We got one that was there for 70 years that are very substantial relationships. And I think that our, each of our business units that are focused on kind of the niche market segments that they are focused on, have good reputations in those markets. And I think our overall performance has led to this kind of a flow of good operating business that's coming to us. And we have done it in a Zoom, noncontact environment. We've done a lot of internal training around how to do this better and getting people to be very comfortable with the technology. And clients have become as comfortable with the technology as well. So it's worked very well.

Steve, for example, PPP loans, there are 2 rounds of PPP, round 1 and round 2. It's important to actually understand how many of your clients are taking care of in round 1 and how many in round 2 because anyone who wants a push to round 2 was probably not happy because they had to wait, and they didn't know there would be around 2 or not. So if you look at a bank and figure out that 10% of customers were done in round 1 and 90% in round 2, you have a lot of unhappy customers. Even though they got, everybody got the loan they were looking for. But it speaks to that one month of actually being on pins and needles, trying to figure out if your bank can do for you what other banks are doing for their clients. Our numbers were, I think, 85% or so of our clients we're taken care of in the first round. I get about 15% or roughly that many who fell into round 2. And customer satisfaction with those is absolutely lower than in round 1. Now then when a bank which has the numbers split, you have a very unhappy customer base. Even if they eventually got a loan, they haven't forgotten the number of times they have to call you and the number of times that you basically said, I don't know when we can help you. And that creates the opportunity for banks like us to be proactive and gather that business.

Yes. I think if I look back on it, we had a really nice blend of an automated process. As Raj mentioned, we ran the first automated process during this that worked well, but we also combined it with high-touch personal communication. And it took a lot of hours. We were all on conference calls until midnight every night doing this. But I think the communication that went back and forth to the client in terms of keeping them informed and making it feel like a high-touch automated combination really worked out well for us.

Our next question comes from Ebrahim Poonawala with Bank of America.

A follow-up, I guess. Most of my questions have been asked and answered. Around the margin outlook, Leslie, you mentioned expect a stable NIM looking into third quarter. I guess, beyond that, I think just listening to Tom around deposit growth feels like you expect to retain the deposits that you got this quarter and then grow some as we look out. Where do you think the margin goes? Like, can the margin actually expand in this environment with, if the yield curve stays where it is? Or is the best case outlook for the margin to remain steady state?

So I think looking out beyond the third quarter, there are just a lot of moving parts, so I'm hesitant to give much more guidance than that. The PPP forgiveness will be a factor. Our level of success and continuing to push deposit costs down will be a factor. How much we're able to grow the noninterest-bearing DDA book over the course of the rest of the year will be a factor. And another factor will be what opportunities we're able to identify to put interest-earning assets on the balance sheet and at what spread. And so all of those things right now, I think, are just difficult to predict. So I hate to not answer your question, but I'm hesitant to put a forecast out there for much beyond the quarter ahead.

Got it. And now if you can remind us, Leslie, what's the PPP fees that you expect to accrete?

I'm sorry, could you repeat that?

The PPP origination fees that you expect to accrue.

Yes. I got that number here somewhere, let me just grab it. I want to say there is $21 million as of 6/30 remaining to be recognized. And like I said, we don't really expect much for business activity in Q3. I don't expect that to start hitting until Q4-Q1 time frame realistically, but there's a total of $21 million.

And the entire PPP loans are funded by the Fed funding. That's correct? That goes away when the loans go there?

Yes. Most of it. Right now, we've got $651 million in PPPLs borrowings on the balance sheet. Where we plan to position ourselves so by 9/30 as any of the PPP loans that are left on our balance sheet, we'll pledge up there, and we'll have them fully match funded.

Our next question comes from Brock Vandervliet with UBS.

Just to follow-up on Ebrahim's question. It seems like if you line it out, you've got 3 catalysts on the funding side: you got better mix, you got CD repricing continuing and you've got this operating account growth focus. And on the asset side, your, how close are we really to the kind of the burnout on resetting on the asset yields? I feel like that's really the question because I think you've got it on the funding side. It's really how much incremental pressure you see on the asset side.

Yes. Everything held constant. I would say this would be the last quarter of that repricing down. The wildcard there, though, is prepayments. And if we continue to experience prepayments, the higher-yielding assets in the portfolio, that could also put pressure on asset yields, and it's difficult to predict how long that goes on. So that's the wild card in that equation, I think.

Okay. And on the expense side, you've got the BKU 2.0 saves juxtaposed with, hopefully, more normalization in the economy and an upward bias in some of those expense figures. How does that, how do you see that shaking out? Or I guess, put another way in terms of a, in terms of the core pickup in expenses with higher activity, how much could you dimension that at all?

We really haven't put any guidance out there beyond 2020, and I'm not quite prepared to do that yet. I think things are just in too much of a state of flux. For Q3 and Q4, I would expect the run rate sitting here today to be relatively flat. And as we get a little deeper into the year, I'll be in a better position to really answer that question intelligently. I just don't feel equipped to do that today.

Okay, okay. But basically a flat run rate...

For the next couple of quarters. And then by then, we'll have a better idea of what the glide path in front of us is.

Our next question comes from Dave Bishop with D.A. Davidson.

A question for you. I know it's just announced, but the fee income initiative, the partnership with Goldman Sachs, how should we think about that? Any guidance you can give in terms of what the revenue opportunity is from that?

Yes. I would probably say it's too early to think about that. But as we look at the opportunity overall, this is a space that we obviously we're not in previously and did not have a product offering. And we have a large client base in the corporate, commercial, not-for-profit areas. So the 401(k), 403(b) and retirement services planning area. There are clearly substantial opportunities in our portfolio. And I think that this partnership will allow us to kind of unlock those opportunities and this alliance that we announced with Goldman the other, just earlier this week. But it's, we're just starting to now work through the training processes and whatnot. It be a little bit too early to put out a target on it. It could be important.

Got it. And then, Leslie, I know in the preamble, you gave some good detail in terms of the granularity regarding the uptick in special mention loans. Curious if you could just walk through that again. It looked like there were some upticks in some of the more granular areas in terms of the...

[indiscernible] backout. Okay, special mention, in the aggregate, went from $288 million to 1.3 billion. We saw increase, that was up $527 million. $168 million of that was in retail. $270 of that was in hotel, only $50 million in multifamily and the rest just kind of drips and drabs. In the C&I book, it went up $329 million. $60 million of that was cruise lines, $54 million was in the retail trade sector. Food services was $53 million, and the rest is onesies, twosies. The franchise book went up by $147 million. And there's some detail on that, too, in the deck, if you want to, towards the back, but those are the high-level numbers. [indiscernible] it was concentrated in those areas where you would think it would be, which was the CRE retail, the hotel, the franchise, a couple isolated credits in the C&I book that are connected in some way to those stressed industries. So exactly what you would have expected.

And if I recall in the deck, crews lines exposure, right, they have not asked for deferments yet?

Correct. We actually think the cruise lines are pretty well positioned. They've all been very successful in raising cash in the capital market. We, back to Raj's point about intellectual honesty, we think it's intellectually dishonest to pretend that the risk profile of that industry has not increased. And so it just seems the right thing to do to move those credits to special mention, even though we believe they are in a position to continue to service the debt.

Got it. And then maybe just commentary. I know there's some energy exposure through the operating leases. What's the current outlook there currently?

So I think similar to what we said last quarter, oil prices actually seem to have rebounded some from last quarter. I don't, they're awfully volatile though. Railcar loads are down. So what we really think is going to happen there is as these assets are re-leased, they're going to be re-leased at lower rates. So I think we'll see that lease rental income kind of trend downward for the foreseeable future. It's difficult to say longer term, what's going to happen, but these are very long lived assets and are, by definition, having in the past withstood multiple cycles. So we'll see how it plays out. And I think what you'll see, it's not really credit exposure, it's really this rental income that is probably going to trail down some for the foreseeable future.

Our next question comes from Steven Duong with RBC Capital Markets.

Sorry, I apologize if this has been answered. Jumped on late. But what are you guys seeing in your overall business activity in your Florida and New York markets, say, from the reopening through mid-June versus the recent spike in cases in Florida?

Tom?

Well, let's start with Florida. I would say that while the case loads are definitely up, it's created a heightened sense of issues in the marketplace. The commercial market continues to move forward. Companies are operating. For the most part, businesses are open. Companies that manufacture and distribute goods or manufacturing and distributing goods and the overall market continues to move forward. It's almost a parallel kind of issue. When you look at what's happening, you see certain health statistics that are coming out and numbers that are obviously concerning. But at the same time, businesses that are essential businesses that are shipping food and components and auto parts and any of the myriad of industries that were in health care, are continuing to operate. Food services continue to operate. Franchise businesses that have good drive-thru models and delivery models are continuing to operate. Occupancy remains strong in the CRE markets in Florida, in the office. In industrial sectors. The industrial sector in Florida is actually on fire. I mean industrial purchasing right now is very, very strong as there's much more demand for warehouse space and e-commerce-related space and things of that nature. So overall, it's not, and we see it in the flow of business that we're getting and the flow of opportunities that we're seeing. It's not a negative scenario at all. New York has opened up, obviously, slower because it had more of a significant impact early on in the crisis, but we're starting to see the construction industry come back. It was early, identified as an essential industry. We have a number of significant construction relationships in the New York market. That's, they're up. The businesses are running. They're, they have projects underway. We're seeing operating businesses in the food and beverage distribution area, just like in Florida, continuing to ship goods and do well. And in the CRE basis, we're seeing, again, office, particularly Class A office, our exposure is a bit more in the Class A office side than it would be B, collections being very high. Multifamily business, we're also seeing rent collections that, at acceptable levels right now. So I would, the economies are functioning. And there are opportunities, and we're seeing business revenue in both markets. Every business is different, obviously. And we're in a lot of different businesses with a lot of different companies, but the overall financial results, I think, are playing out fairly well, and that's what we see in the deferrals.

The Florida economy...

[indiscernible] has gone there. Deferrals are the real test to payments.

Yes. And the Florida economy, despite all the negative news over the last 3 weeks or so, at least to us, it doesn't feel like it has slowed down. So the numbers are obviously bad. On the health care front, they are beginning to level off or at least keeping up in their trough over the last 10 days or so. We're seeing them level off at still pretty high levels, but it has not impacted, at least from what we can see, the economic activity in Florida. And New York has just been more careful and slower with opening up the economy. The health care numbers look great and the economy is slowly opening up. And I think the trajectory would just be, the slope will be much less than Florida. Florida was a very steep increase starting in May 1. It just went straight up and, but we don't see signs of slowing down. Maybe a few bars will be closed here and there, but we're not seeing any signs of some kind of let's go back to a shutdown or slow everything down. That is not the sentiment on the ground.

Yes. When you look at the C&I business, particularly in either Florida or in New York, but even more so in Florida, what is happening in Florida individually is important. But if you're doing business with a company that's a $500 million-company shipping goods around the U.S. and Canada and Europe, what happens in Florida is not necessarily the only driver. While the businesses are located in Florida, they're national and international businesses.

Got it. So let me ask it this way then. If the spike in cases never happened, would you say that business wouldn't be that much better? It would just be similar to where it is now for Florida?

No. It's kind of hard to say. That's a tough one to tell.

The hard thing to measure is the impact that, that has on confidence. Would more people be traveling to Florida and staying in hotels if it hasn't been for that? Maybe. But it's really difficult to know.

Right. So have you guys been seeing anything?

[indiscernible] line.

Yes.

Have you guys been seeing anything as far as consumer confidence goes?

Our evidence is more anecdotal, so, and maybe it's a little too early. But from what we see from talking to our clients, we haven't yet seen, I think your question is a good one, that if this had not happened, would the slope of this recovery, looking forward, been better, I would think it would have been better. I think more people will go to Disney if there weren't 10,000 cases a day in Florida. And so I'm sure that has an impact on Disney and Universal in Orlando. So it does have an impact, but it doesn't have a level of impact where things would backtrack that we go back to numbers in May or April, no, we're not seeing that. So, but I'm sure, if Florida is not able to control this, you will have, on the margin, it will be a slower recovery. The health care has to, health care situation has to improve. And if it really gets out of hand, then it might even go back. But we're not, I think the numbers, we monitor these very, very carefully, as you can imagine. There is some optimism. The numbers aren't getting worse over the last 10 days or so. And, not just in Florida, but I think all the other, the Sun Belt states have got hit hard in the last month are beginning to curb their numbers somewhat.

Right. Yes. I guess it's always hard to try to assess the economic impact when these cases rise. And so just trying to separate, understand the news versus what you guys are actually experiencing.

What I can tell you that on the street, and again, to Raj's point, it's anecdotal. Tom gave you some really good data point. Things we're hearing from our customers, I will tell you that I belong to an organization called the Florida Institute of CFOs. And when we meet and we speak, and this is CFOs from businesses all across the state of Florida, all different types of industries. Yes, it's an optimistic group. None of these people are saying, oh, my gosh, I think my business may not survive this. You're not hearing that at all. People are out and about. People are doing things. The level of activity is strong. Now all of that is anecdotal, not statistical, but...

Now all we have to do is get the Floridians to wear mask and everything will be fine.

Well, just a final one on this one. So let's just say like we were just to make some risk assessment here. If the economic recovery stalls, flat lines through the end of next year, would you, would that make you reassess your reserves?

Well, of course. I mean, I kind of outlined for you what the assumptions are that are built into our economic forecast. If unemployment doesn't go down between now and the end of next year and GDP doesn't improve, and if nothing improves, if there is no trajectory of recovery whatsoever, then yes, of course. Not only ours, but everybody will have to reassess their reserves. If there's no, I have not seen one bank because economic forecast thus far does not include some trajectory of recovery from here. So if that is erased, sure. I think everybody will have to reassess the level of their reserves.

Our next question comes from Chris Marinac with Janney Montgomery.

I can keep this brief since it's been a long call. I know there was a lot of focus on Slide 15 on earlier questions. I was wondering if we shouldn't just focus on Slide 10 in addition to 15 just because your capital is strong and...

No. [indiscernible] real quick, Chris.

But Leslie, doesn't that play into the whole reserve and capital question? I mean, to me, together, they're very strong, and it really gives you a buffer because of the CECL. I think you gave a lot of discussion about that. Just kind of want to ask that question on how you think of capital here.

Yes. No, absolutely. I mean, I think Slide 10 is very illustrative that our reserves sits at 60% of 2020 DFAST, severely adverse losses, which a lot of our specific peers don't disclose because we're no longer required to run that DFAST scenario and disclose the results publicly. But when I compare it to what's coming out for the regional banks, our reserve is sitting at a higher level of 2020 DFAST severely adverse and a lot of the regionals are sitting at. You can see clearly that even with that level of stress, you can see where our capital ratios land and it's comfortably above any well capitalized minimums. So I think there's plenty of capital cushion even if we have further stress from here.

I'm not showing any further questions at this time. I would now like to turn the call back over to Raj Singh for any further remarks.

Thank you, everyone, for giving us time. Sorry it took so long. I wait for the day that we could go back to normal and don't have to provide a 50-page deck. But until things get normal, these calls will be a little bit longer, our disclosure will be a little more extensive. But appreciate you spending time with us, and we'll see you in three months. Thank you.

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