BankUnited Inc (BKU) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankUnited Fourth Quarter and Fiscal Year 2017 Earnings Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. [Lisa Shim], Senior Vice President, Corporate Development. You may begin.

Good morning, and thank you for joining us today on our fourth quarter and full year 2017 earnings conference call.

On our call this morning are Raj Singh, our President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer.

Before we start, I'd like to remind everyone that this call contains forward-looking statements within the meaning of the U.S. securities laws. Forward-looking statements are subject to risks, uncertainties and assumptions, and actual results may vary materially from those indicated in these statements. Additional information concerning factors that could cause actual results to differ materially from those indicated by the forward-looking statements can be found in our earnings release and our SEC filings. We do not undertake any obligation to update or revise any such forward-looking statements now or at any time in the future.

And with that, I'd like to turn the call over to Raj.

Thank you, Lisa. Let me correct the operator by saying Lisa is Head of Corporate Development, Strategy and Marketing. I want to congratulate her on her recent promotion.

Also, I'd like to say that I'm actually very disappointed that we only have 94 people on the call today. Usually, we have a lot more. On a quarter like the one we've had, I was hoping it'd be a much bigger number, but I understand that there are a number of banks reporting this morning.

So having said that, let me thank everyone for joining us. And this has been a remarkable year and an eventful quarter, to put it mildly. This year, in 2017, we've delivered double-digit earnings growth, double-digit EPS growth, double-digit loan growth, double-digit deposit growth. And we've done this all while redirecting our strategy to diversify our business mix, diversify our balance sheet, and we were able to achieve that in a pretty meaningful way in a very short 12-month time frame.

As you all know already that we did recognize a discrete tax benefit. Let me get the map of that -- out of the way first, then we'll talk about the rest of the company. We booked $328 million roughly of this discrete tax benefit. It's made up of $295 million anticipated federal refund, which we've already talked about -- we put an [AP] out, I think, in late November. There's a $24.2 million in estimated state tax benefits and an estimated 8.5 -- or $8.7 million in estimated interest. So all that adds up to about $327.9 million in this discrete tax benefit. Given this significant infusion of capital, our board recently met and authorized $150 million repurchase program -- or share repurchase program. The shares may be purchased through open market transactions or private transactions from time to time in amounts that the management determines to be appropriate.

Putting that aside -- and the thinking over there -- just a little bit on that. We -- as you all know, we do a business plan, a 3-year business plan at the end of each year looking forward 3 years out, and we basically ran our best guess of what the company can do over the course of the next 3 years given what we know about the environment. And we said if we have any excess capital that we cannot deploy for the next 3 years, that's probably too much capital, and that's also about $150 million. And we said, let's put that aside for our share repurchase program. So that was the thinking behind the $150 million.

Net income for the quarter was obviously large, $417.8 million or $3.79 per share. But if you take out the tax benefit, the net income was also very impressive at $94.8 million or $0.86 per share. This compares to $63.3 million in the fourth quarter of 2016 or $0.59 per share. And I think the third quarter number was $0.62 per share.

Net income for the year came in at $614 million or $5.58 per share. And if you exclude the tax benefit, it was $291.3 million or $2.65 per share. The $2.65 compared to $2.09 from last year, a very, very impressive 27% increase in EPS over the prior year.

NIM decreased to 3.52% from 3.67% for the comparable quarter of 2016. Leslie will give you a lot more details on the NIM when she gets to her section. And the NIM was 3.65% compared to 3.73% for 2016 for the full year. Decline in NIM, has always been the case with us, is really directly related to the runoff of the loss share loans, and now we're in the last 18 months or so of loss share and increasing cost of funds.

The cost of deposits rose to 94 basis points compared to 87 basis points from the previous quarter and compared to 69 basis points for the corresponding quarter of 2016.

Very importantly, tangible book value per share grew by 23% over the last year, including the tax benefit. But more importantly, I don't look at this on a year-to-year basis, I look at it over the long term. Since our IPO, which was in 2011, we have grown by 11.6% CAGR, and we've done that while paying a pretty healthy dividend of $0.84 a share for the last several years.

Talking about balance sheet growth. Fourth quarter was a strong quarter for us on all fronts. Loans and leases grew by $852 million and deposits grew by $655 million. We did break our streak, which we had over the last 3 quarters before this. Loan growth was always a little less, our deposit growth was outpacing the loan growth 3 quarters in a row. But this quarter, it flipped, and we've had more loan growth than deposit growth. Though for the full year 2017, loans and leases grew by $2.2 billion and deposits grew by $2.4 billion, and our loan-to-deposit ratio went in the right direction.

Credit quality remains strong with one exception, which is taxis. I hate talking about it, but that's nevertheless the only thing to talk about on the credit front. There is no other signs of systemic credit deterioration anywhere else in the portfolio with that one exception.

Our nonperforming loans ratio at the end of the year was at 82 basis points, and 51 of that 82 basis points was actually attributable to taxi. Our net charge-off last year in the non-covered portfolio was 38 basis points, and 29 of that 38 basis points was taxi.

Quickly, in terms of guidance that we give you for next year, I would say next year would look -- should look similar to this year in terms of growth. We are expecting 10% to 15% loan growth, 10% to 15% deposit growth and high single-digit expense growth.

I'd rather not give you guidance on margin. That's -- we'll let Leslie do that, [just so I've messed that up] she's telling me.

Great.

So Leslie will give you guidance on margin.

With that, I will turn this over to Tom, who'll talk a little more about each of the business lines.

Great. Thank you, Raj.

On the loans and leases basis, the non-covered loan portfolio remains very well diversified across all of our platforms with Florida and the national companies now comprising a larger portion given the shift that we've had with respect to our New York multifamily loans. So at year-end, the Florida portfolio was $7.4 billion or about 35% of the portfolio. The New York region was $6.1 billion or about 29% and the national portfolio also was $7.4 billion or about 35%, 36% of the total.

As Raj noted, if you look at the quarter, it was a strong quarter for us. Traditionally, the fourth quarter is a very good one. Florida grew by $465 million for the quarter while the national platforms grew by $359 million. New York is expected to remain relatively flat but did grow by $29 million for the quarter. Across the individual units, the national platform growth included $162 million of residential growth, $131 million within Pinnacle Finance and $60 million within the Bridge Finance Group. So it was a strong quarter all the way around for all of the national businesses.

Mortgage warehouse business did dip slightly seasonally in the fourth quarter but remained a strong grower throughout the year for us. New York multifamily portfolio continues to run off a decline by $169 million for the quarter, but that was more than offset in New York by $198 million in growth across all other portfolio segments, which would include CRE non-multifamily growth of $82 million, owner occupied, C&I-CRE-type loans of $43 million and then C&I loans of $72 million. It was a very strong year for us in New York in the C&I markets across the board.

Florida, as I mentioned, had a very good quarter. Overall C&I growth for the quarter was $175 million. And as we alluded to last quarter, we thought our CRE growth in Florida would be better than all 3 quarters previously combined, and it was $284 million, including all asset segments within the CRE segment.

As of end of the year, our regulatory CRE concentration as a percentage of total risk-based capital is at 240% continuing its downward trend. From a deposit perspective, it was a good deposit quarter across the board. All platforms grew within the company for a total deposit growth of $655 million.

Now I'll turn it over to Leslie.

It's a very broad-based growth. Not one thing sort of eclipsing and no one business line eclipsing this. It's pretty broad-based across the board with the exception of multifamily, which we have been running down as, and then that will continue, and mortgage warehouse lending, which was seasonally down only $5 million or $6 million. But everything else was up nicely.

Leslie?

Thank you.

Talk a little bit about yields and the NIM for the quarter. The yield on interest earning assets was 4.56%, down from 4.60% linked quarter but up from 4.44% for the fourth quarter of 2016. This quarter, we did have a little bit of an unusual item affecting the yield on earning assets. We had a retrospective accounting adjustment resulting from an increase in prepayment speeds on certain securities in our bond portfolio. That had the impact of reducing the yield on securities for the quarter by 20 basis points and actually reduced the NIM for the quarter by 5 basis points. So that was impactful this quarter, and I wanted you to make you aware of it. We saw increases again in the yield on both non-covered and covered loans linked quarter and compared to the fourth quarter of 2016.

Cost of deposits was up 7 basis points to 94 basis points from 87 linked quarter. The combined yield on the FDIC asset and the covered loans for the quarter was just shy of 17% and right around 13% for the whole year.

For the full year, the NIM declined from 3.73% to 3.65% due to higher cost of funds and continued runoff of the covered loans. The yield on non-covered loans increased to 3.75% for the year from 3.58% for 2016 while the overall yield on earning assets, which was also impacted by -- slightly by that retrospective accounting adjustment, but it increased to 4.58% from 4.51%. And the cost of deposits increased to 83 basis points for 2017 from 66 basis points for 2016.

I'll talk for a minute about taxes. You already know about the large tax benefit we booked this quarter, so I won't belabor that. In addition to that, we did report a benefit of $3.7 million related to the revaluation of our deferred tax assets and liabilities due to the change in the federal tax rate.

We currently expect the ETR for 2018 to be between 23% and 24%. That really assumes no material change in our asset mix or tax strategies because we don't have time to fully evaluate any of those options yet. That is slightly higher than the federal statutory rate because it includes state taxes and the federal benefit of deducting those is now lower, and we are obviously receiving a lower benefit from our tax-advantaged assets. And there's also the nondeductibility of a portion of the FDIC premium, but we're still seeing a material decline in our effective tax rate and a positive impact to earnings from that tax law change.

We did sell an -- kind of different transaction this quarter. We sold substantially all of the covered home equity loans and lines of credit during the fourth quarter. So the ACI home equity pool is now gone. This transaction had a net positive impact on pretax earnings of $16.2 million due to the recognition of the remaining accretable yield on that pool.

I'll talk a little bit about reserves and the provision. The total provision for the quarter related to non-covered loans was $6.5 million. The provision related to taxi loans was actually $8.6 million. We had decreases in the net charge-off rates that we used to calculate our general reserves, partially offsetting that as well as reductions in some of our specific reserves. And additionally, we had put up last quarter a $5 million unallocated reserve related to the impact of Hurricanes Irma and Harvey. We completed during the quarter our borrower-by-borrower analysis of the impact of that and released a substantial portion of that reserve. Of the 5, we released 4. We've still got $1 million, which we allocated to portfolios where we think there may be some exposure.

So overall, the reduction in the allowance for the quarter was primarily a result of charge-offs taken. We took a total of $15.7 million in charge-offs, $9.5 million of which was taxi. And that's the main thing that is leading to the reduction in the allowance for the quarter as well as that partial release of the hurricane reserve.

A quick update on the taxi portfolio, which we're getting really tired of talking about, but it's still there. Total exposure is now $106 million, down from a $121 million at 9/30. That reduction is due to the $9.5 million in charge-offs that I referenced and a little over $5 million in payments that we received.

We continue to use our cash-flow-based methodology as a cornerstone of our reserve calculations consistent with our resolution strategy for the portfolio. That methodology solved for a valuation of $304,000 this quarter, down from $351,000 last quarter. We've charged the loans down to that value and in recognition of continued downward trends and valuations and some limited number of sales at lower prices, we maintained an additional 15% haircut to that valuation in the form of a specific reserve. So that leaves the reserve on the portfolio of about $12.2 million or 11.5%.

Total delinquencies in the portfolio are $17.7 million, $8.3 million of that over 90 days. Charge-offs to date total $67.8 million. As I said, $9.5 million of which were in the most recent quarter, and the entire portfolio remains on nonaccrual.

With respect to forward guidance, Raj gave you some guidance about loan and deposit growth and noninterest expense. I'll give you a little bit of margin guidance. The net interest margin for 2018, if we didn't take into account the impact of the reduction in the federal tax rate on our tax equivalent yields, was then projected at about 3.50%, and then we estimate around a 9-basis-point impact to that from adjusting the tax equivalent yield on our tax-exempt assets to take into account the change in the tax rate from 35% to 21%.

Other than taxi, unless we see evidence of deterioration in the economy generally or conditions in our primary markets, which we aren't currently seeing, I wouldn't expect reserve levels to change materially. So I would think they would be somewhere in the 70-, 75-basis-point range over the course of the next year. Taxi is just difficult to predict.

Future estimated accretion on the covered loans, and this kind of corresponds to the numbers we put out in our investor deck in November, over the period between now and termination of loss share, pretax, we expect $445 million in accretion and $141 million in amortization of the indemnification asset.

And net of tax at a marginal rate of 26.5%, that would be $224 million in earnings. The combined accretable yield is still forecasted to increase as we move forward. For 2018, we currently estimate that will be around 25%, but as you know, that can be difficult to predict with precision.

That's all I have. I'll turn it back over to Raj for any closing remarks.

Thanks, Leslie.

I should have mentioned this at the beginning. Just from a macro perspective, we see -- while we can't see too far out into the future, what we do see into the future of the next -- over the next 6 or 12 months, we see a fairly healthy economy in both of our primary markets and in -- even nationally, wherever we play. So we always stay cautiously optimistic and always ready to take an outlook if we see any cracks anywhere and they're coming. We don't see them yet. So we're happy. The economy is doing as well as it is. The tax law change will be another boost to the economy, especially here in Florida. And the regulatory climate is getting better as has been reported numerous times. Even the legislative environment is getting better, and there might be some legislative reforms as it relates to bank regulation. All positive news for us and the industry and for the country.

So with that, I will turn it over to the operator to take any questions.

(Operator Instructions) And our first question comes from Lana Chan from BMO Capital Markets.

Two questions. Just wanted to double-check in terms of guidance for 2018, still targeting double-digit loan and deposit growth. Where do you think the loan growth is going to continue to be skewed towards Florida and the national platform, I assume?

It will be -- yes. And in New York, outside of multifamily asset class, everything else is expected to continue to grow. But overall, New York, the growth will be lower than national and Florida because it -- of the headwinds from the New York multifamily portfolio.

Okay. And secondly, in terms of -- with the buyback, could you talk about how you view the capital levels in conjunction with the double-digit loan and deposit growth? Any targets on the capital ratios that we should think about?

Yes. Our capital targets really haven't changed, Lana. We've always targeted, at the consolidated level, the Basel III fully phased in, including the capital conservation buffer plus a cushion of somewhere in the neighborhood of 50 to 100 basis points. We run with a little bit more capital at the bank than we do at the holding company because of that's where the growth is happening. And generally, TCE and the TA is not below 8. So -- but none of that has changed. That's consistent with what we've always said.

Okay. And then just one more, if I could, in terms of if you could talk about deposit pricing, competition in your various markets.

Deposit pricing competition is tough. It is tough in both markets, in New York as well as in Florida. It's tough in retail, but more on the CD front. And with commercials more in the money market space, not so much yet in ECR, but we see that creeping up as well. It's not just banks that we used to -- always compete against, but now there are a lot of other avenues for people to put short-term money to work, from treasuries to money market funds. So competition is severe. So if I we -- if I do look at the competitive landscape, I think deposit pricing is probably the toughest place -- yes, the thing that we worry about the most. And it's -- and by the way, even in our national business, so that's our third business, deposit pricing is pretty hot.

Our next question comes from Brady Gailey from KBW.

So when you look at the loan loss reserve, I know on a percentage basis, it declined, I think, around 7 or 8 basis points linked quarter. Leslie, I know you talked about how releasing some of the Irma -- what you had reserved last quarter. But as we look at the reserve going forward, I mean, it seems like 70-ish basis points should be a low point and over time, that should trend higher. Is that the right way to think about the reserve from here?

I think it is, Brady. I wouldn't expect it in -- over the course of the next year to trend materially higher than that unless, as I said, we see something develop in the economy or in one of our markets that we think is putting pressure on credit. We don't see that today. But generally, yes. I think that's a reasonable way to look at it.

All right. And then on the buyback, it's great to see you guys announce a buyback. The stock has had a nice move over the last 3 or 4 months. So I was just wondering how price-sensitive or price-focused will you be in repurchasing this $150 million?

Brady, we're not going to show our hand too much on the buyback for obvious reasons. The board is discussing the parameters of the buyback, and we'll follow the guidance that we get from the board and advice we get from our friends at capital markets.

All right. And then lastly from me. Leslie, you mentioned prepayment adjustments down in the bond yield that added 20 basis points -- or took away 20 basis points. Is that -- that's just a onetime thing, that will be not be recurring. Correct?

I sure hope so. As far as I know now, yes.

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

I think -- just first a question in terms of -- Raj, we'd love to hear your thoughts around the Florida economy where C&I, CRE growth is coming from because clearly, there's some concern about the runoff in real estate markets. And how we should think about sort of the nonowner occupied growth ratcheting up on Florida, like color around C&I and CRE in Florida would be helpful.

Actually, I'll have Tom talk about that.

Sure. If we look at both the growth in C&I Florida and CRE Florida, the first thing I would say is, it is broadly geographically distributed around the state. So we have the benefit in Florida that you really have 5 major non-correlated completely economies happening in each of the major markets we're in, obviously, Miami, Fort Lauderdale, Tampa, Orlando and Jacksonville. Each has its own industry segments and each are growing rapidly across virtually all industry segments that we're in. So we're seeing significant opportunities within things like international trade and transportation. In the C&I book, we're seeing large growth in basic wholesaling and distribution businesses. We're seeing significant growth for the year in health care-related business segments, which make up about 19% today of the Florida GNP so that the -- from a C&I perspective, the growth is pretty broad. We've always had a major sector related to food and beverage distribution, which we like that segment a lot. And we're a significant player in that market, and we think that's very recession proof. So from a C&I perspective, it's very broad across all industry segments and across all geographies. Our Florida CRE portfolio, which had just a little under $500 million of growth for the year, also has many of those same attributes as it relates to both geographic and product distribution across the markets. We're almost an equal player in each of the 5 major asset categories. Our general outlook for most of those asset categories is fairly strong. I would probably say, the only market where we might have some level of slight negativity would be the high-end hospitality market in Miami-Dade County. But other than that, office remains strong, multifamily remains strong. The commercial and industrial markets from a lease-up perspective are extremely strong across all of the major markets that we're in, particularly Miami-Dade County. So it's pretty broadly diversified, both state-wise, product-wise and industry-segment-wise in Florida.

That was extremely helpful. And Raj, you mentioned about regulatory relief, possibly some legislation. I'm assuming you were alluding to the $50 billion asset threshold. Like when we think about your bank at $30 billion in assets, like -- where do you think regulations would be most impactful? Like what could happen which makes life better for BKU in 2018?

I don't think it's a 2018 thing. I think it's a long-term thing. Having the SIFI number move up from $50 billion to a higher number takes a lot of sort of medium term pressure off. While we're not solving to be a $50 billion bank yet, we're going to have to start doing that soon. But if that number moves out, it helps tremendously with CCAR and LCR. So that's the big part of that bill that -- in terms of M&A also, for example, any $30 billion bank buying or merging or selling, you have to think about that threshold as -- these assets that are on our balance sheet will certainly cross that threshold. If you do a deal, it'll happen much sooner. And so relief on that front is very meaningful, not for 2018, but it's very meaningful for the medium term. I won't even say long term. So that -- we'll see if that ever becomes the law of the land, but we're hopeful. It's come a long way in the last 2 or 3 months. And it seems to have bipartisan support which, as you know, very few things in DC have these days. So it's good to see that.

Fair enough. Understood. And I'm just wondering why are we letting multifamily in New York runoff again the [CRE]? I mean, I'm just wondering, it seemed like you didn't want to cross the 300% threshold. You slowed down growth there. I'm just wondering why are you not reengaging in that market given sort of the regulatory backdrop and the core sort of niche where you were sort of catering to -- they're probably still relatively healthy in New York.

Two answers to your question. One, terrible markets. They have not really moved that much. In fact, as the yield curve has flattened out, they've gotten worse. And two, it's not the 300% that we're solving for. We're right now at -- what is it, Tom, 440%?

240%.

So we're far -- far away from 300%. But that's not the reason why multifamily has been taken down. We certainly don't want to cross 300%, but at the same time, we want a more diverse portfolio. And we were not -- especially going back 1 year ago or 1.5 years ago, we were really extremely heavily weighted into New York multifamily and were trying to build a more diverse portfolio. The regulatory concerns with New York multifamily as an asset class, I don't think that has to do with any particular regulation out there. I think it's just a view of our primary regulator that, that the underlying collateral, which is New York multifamily loans for the cap rates that they have, they are in stratospheric valuation category. And nothing good happens lending into that over the long haul. As the rates rise, there's refinance risk in that portfolio. And that's what we're trying to [whittle] down and get to a more reasonable number. So you will see that continue to decline. Overall, I think the New York CRE business will be fine because we are doing other kinds of CRE business. It won't be -- it won't grow at an impressive pace like it did a couple of years ago, but it will be fairly stable. And you will see that change in sort of mix where New York multifamily going down and other types of CRE or owner occupied and nonowner occupied CRE continue to grow.

I would also add that the transactional volume in the New York multifamily market is down significantly from previous years. So more of the business...

For the industry.

For the industry overall.

Yes.

So more of what you see today is the refinancing of existing debt versus new transactions happening. And that market has become increasingly dominated by government-sponsored entities, lifecos and other long-term players who are in the market at rates and structures that are probably not as appropriate for the commercial banking industry versus other longer-term industry structures.

Got it. And if I can sneak in one last one. Leslie, sorry if I missed it in your remarks, but the high-single-digit expense growth, is that relative to your reported expense number less the FDIC amortization expense? Or should we be making any other adjustments?

Yes. No, just that.

Our next question comes from Ken Zerbe from Morgan Stanley.

Just a question. In terms of your -- the New York City, the non-multifamily market, right? If we think about sort of traditionally, the multifamily market in New York is very broker-driven, and you have a couple of offices in New York and you can do a lot of business, right, in theory because you're working with the brokers. Your push towards the non-multifamily, more C&I, some CRE, but as you're making that push, do you need to change how you operate in New York? Do you need to open up a lot more branches? Or how are you driving that growth? Because it is a different strategy than just multifamily.

So Kenneth, this is Tom. If you look at the C&I business, for example, we have recently expanded our C&I lending capability by bringing in a team in the Westchester market. We have an office in Rye Brook that's now servicing Westchester and Connecticut. Actually, 2 weeks ago, we opened up our first office -- well, actually, [end of] last week, officially in New Jersey. We brought in a team from another bank to focus on the New Jersey middle markets. So our C&I and business banking reach is geographically moving, and we're adding resources to both the corporate banking team and the business banking teams in New York to be able to reach into markets that are non-New York City, let's say, centric C&I lending markets. So that's a pretty significant increase at our resource capability in that market. And our C&I and business banking books, both in the New York market, grew very substantially for the year. And from a CRE perspective, we're tilting towards other asset classes. We have done a fairly significant amount of new production. And our current pipeline is more focused on non-New York City multifamily, but I would say, it's Greater New York, including Long Island, Connecticut, Westchester and other areas, office, what I would call urban service retail, looking at hospitality markets and looking at other markets. Some of that business continues to come from your existing broker channels because your major brokers, not only obviously represent multifamily owners, but they represent other asset classes as well. And we have clients that are not exclusively multifamily players, but we have not always played into other asset classes, and that's what we're looking to do. So the model changes a little bit, but more C&I geography wise and more just an expansion of what we're doing alternatively with existing clients and brokers on the CRE space.

But I would add to that, that does not mean opening branches in New Jersey or Westchester.

.

Right.

This is about how hiring producers in the right places. (expletive), we even hired a producer in California last quarter or actually -- maybe this quarter or...

January, I think, yes.

This quarter. That's actually on the [national] deposit side, we were doing business -- starting to do more and more business on the West Coast and we needed coverage on the West Coast. And we've hired our first producer in California, so we'll -- without really putting a lot of infrastructure as in branches and back office and so on. It's more about hiring producers in the right places and the right kinds of producers. And you can do a lot of business with 2 or 3 people as long as you hire the right people.

So these are wholesale banking offices.

Yes.

Got it. Understood. Okay. And then one other question. In terms of your long-term margin outlook, right, I got the 3.50% sort of less 9 basis points. But once we get past all the FDIC accounting noise, so you're in the back half of '19. Obviously, your core NIM right now seems fairly low, let's just say, sub-3%. Can you just give us an update in terms of what you're doing to drive or get that NIM moving higher by the time you come out of the FDIC loss share?

So as you know, we don't provide forward guidance, really, going out more than a year because a lot of things could happen to change the world between now and then. But...

Yes. More the conceptual -- concepts of what you guys are working on.

Certainly, I think there are 2 major things. One is continued initiatives geared towards optimizing our deposit mix, that's huge, probably, the most important piece. And all of the things that Tom's been talking about with respect to diversification of our loan portfolio. As Raj mentioned, the New York multifamily business is not today particularly a high-margin business. So as we expand into some of these other -- more -- in a more robust way into some of these other asset classes, that should also have the impact of bringing slightly higher yielding assets onto the balance sheet.

Changing business mix at the bottom line is what will drive higher margin. You can't just say I want higher margin. I want to keep doing the same thing that I was doing yesterday. Margin is dictated by the market that you operate in. And if you don't like the margin, you've got to go find another market, another product. And that's exactly what we're doing. We're not abandoning, let's say, multifamily. We're still a player in multifamily, but we are deemphasizing it for sure. On the other hand, there are other business lines that have better margins, whether it's warehouse lending or Florida C&I or what have you. And we're putting out, getting more capital, to those businesses. And overall growth, we've taken down quite meaningfully. We used to grow at $4 billion a year, and now we're growing at $2 billion, $2.5 billion a year. And you can be more selective. So the business that is coming on today, if I just compare this to 2 years ago, it's coming on at a higher margin. Overall margin in the portfolio doesn't change in a quarter or 2 or even a year. It takes a while because these are long-dated assets. But as -- we're focused -- at least, I am very much focused on 2020 more than '18 or '19 because I know this is going to be a noisy year with loss share, next year as well. But 2020 is when everything is sort of all behind us, and that's plenty of time to shift our business mix to higher-margin businesses. It still will not be extremely high-margin businesses because we've chosen not to be in very risky businesses. You are new -- certain kind of consumer lending, you can get a lot more margin. But without changing the risk culture, there are tweaks you can make to the business mix to move your margin higher over the course of the next 1.5, 2 years.

And our next question comes from Jared Shaw from Wells Fargo Securities.

Raj, when you're talking about the growth for 2018 looking similar to what we saw for 2017, are you talking more dollars or rate of growth as we look out over the year?

Usually, we have given, for many years, a number. This year, we changed that in sort of giving you a number of growth, rather give you a range. So 10% to 15% is -- it's hard to -- a number that's just a little hard to solve to. So 10% to 15% for the long-term deposits is about as comfortable as we feel giving out.

And then as we look at the headwinds or the continued pay down on the multifamily side and assume that we start to -- the relative impact of that goes down, should we be thinking that the -- that rate of growth increases as we go through the year? And starting 2019 that, that may be a higher run rate?

I wouldn't give you guidance on 2019. So much can happen between now and then. There is more moving parts to this than just the -- I'll give you an example, we were talking this morning about municipal lending. We're a reasonable size player in the municipal [command] space. And honestly, we don't know how the market will respond to the new tax law. There has been a big change on corporations. Their tax rate has come down, that's great news. But individual taxes have not really moved meaningfully. In fact, in some states like New York and California, individual tax rates for high net worth individuals have actually gone up, including state taxes. So how will that change the landscape of municipal finance? Will the paper become more attractive to individuals versus corporates? Does that -- is that a good thing or bad thing for us? How much of an impact will that have on our business? There are a lot of moving parts to this. So to try and predict -- I just have one example. There are -- I can put -- or talk like this about each one of our business lines. There's a lot of variability in what will happen. 10% to 15% is our best guess. 2019, when we get there at this time next year based on what the economy is doing, based on what the regulation is doing and where the margins are, we'll give you guidance again, but it's hard to say. I will say one thing. You will have choppiness quarter-over-quarter.

[Next], Q1 will be lower.

Q1 will be lower. Mortgage warehouse lending will -- the utilization will drop just like it did last year and the year before. So C&I will have a slow quarter. But that doesn't mean you should look at one quarter and annualize. There will be seasonality. And our second quarter, for the same reasons, will be a strong quarter just because everything comes back in the second quarter. So please keep that in your mind and keep that in your models. I think the best way to look at our numbers is really on a 4-quarter rolling basis rather than any one quarter.

Okay. Great. And just on the capital side, great news on the buyback there. But with the dividend payout ratio coming down and the growth rate relatively similar, should we expect to see maybe potentially other capital management strategies coming into play besides the buyback, whether that's an increased dividend or a special dividend?

I -- we talked about the dividend with our board. And our board felt, at this point of time, that the dividend is in a good place relative to our peers. And our payout ratio is in a good place. I think we will revisit the dividend post loss share. And that's probably the most likely time that the board will look at this again. But maybe in the second half of '19 or early 2020, I don't know yet, but I think we'll probably wait until the loss share is over.

And then finally from me. Could you just give an update on what is remaining for loan sales under the loss-share agreement through this May measurement period?

I don't have that number in front of me. And we have $280 million roughly of UPB a year that we can sell, but I, frankly, don't have that number in front of me. And let me just say, too. With the loan sales -- one of the things I think you probably understand that, that loan sale gain is not like a windfall. That's just taking part of that giant accretable yield number and pulling it into this quarter. It's not like it's extra. It's just all about timing when those earnings come in. So yes.

Our next question comes from Dave Rochester from Deutsche Bank.

On your deposit growth outlook. I was just wondering what your thoughts are on the large deposit team's contribution to that. And if you can just give us an update on the progress there and when you think we might start to see more of that mix shift to the lower-cost demand and DDA and whatnot that you guys have talked about.

So the banking deposit business is doing well. We've never published numbers as to exactly what level they're at, but they are at a pretty decent place relative to the business plan that they laid out for us when we started that business. The first 1.5 year -- it's been about a 1.5 years, I think? Yes. Since [they've been] here -- the team has been here. We've added to the team over the course of the last year, and we continue to add like the California expansion that I talked about, which happened only this month. The business mix over there has been heavily skewed towards interest-bearing accounts with over 90% of it being interest bearing and, I think, only 7% or 8% is DDA. This is the year for them to actually move the needle on bringing in core DDA. The first year, 1.5 years, the expectation was always for that to be more interest-bearing. So this year, the goals are not just to keep growing the total, but also to change the mix. And we'll see how well it does. So far, we're very happy with their progress and what they've achieved in a very short period of time.

What you're saying is that this is the year for that mix shift. Is this also the year where they're going after some of the bigger deposit accounts that they were dealing with at their prior institution?

They -- yes, they have been going after the business. But remember, they came from a very large institution. We would never comfortable taking on very, very large accounts. So that's sort of a risk management threshold that we have. We don't like to take on billion dollar accounts because that creates too much volatility in our deposit portfolio. We have very conservative limits compared to the size of some of these accounts, and we'll never take on that much. But -- then they had about $20 billion of business, and we were never expecting to get $20 billion out of it. I think I publicly said to get 1/3 of that over the course of a few years, that would be a home run for us. So it is a larger-ticket business. It is a national business. It's not like they have lots and lots of $3 million, $4 million accounts. The average ticket size or average account size already is large, but we've not changed our threshold for sort of the largest account size that we will take on. I think never in the company, from the day we started the company, we've had -- our deposits have almost tripled in size, but our internal thresholds of what we take on as the biggest account has not changed or at least not meaningfully.

Okay. Appreciate the color there. And then just on the margin, what are you guys baking into your NIM guidance for rate hikes in the shape of the curve?

So what's in our guidance right now is a pretty flat curve. I mean, we just use the consensus forward curve and...

As it was...

At the time, we put pencils down on putting our business plan together which was...

A couple of months ago, yes.

A couple of months ago. So it's a fairly flat curve, and I believe it factors in 3 moves by the Fed in 2018.

It is nice to see a slight movement in the -- on the long end of the curve over the last 2 or 3 weeks. That's -- I hope that is sustained, and I hope it gets even steeper. But when we were putting this together back in the late fourth quarter, this -- the curve was not looking very good.

Yes. So that recent steepening is not factored into our guidance. And the other thing is that we are projecting spreads that are effectively what was -- what we were looking at in the fourth quarter also. So pretty narrow spreads as well and...

Yes. So there's some positive stuff that's not really baked into that. And then you also said in -- I wanted to make sure I got this right. Earlier, you said that, that 5 basis point hit from the securities, premium and adjustment unwinds next quarter. So all else being equal, NIM steps up 5 bps. Did I hear that right?

Yes. I mean -- okay. That might be trying to be a little too precise, but -- but it should go up, yes.

Yes. In theory, yes. Okay. Got you. And then just one last one, just on the loan growth guide. How much of that multifamily, the New York City multifamily runoff, are you baking into that guidance at this point?

I don't have that number in front of me either.

Okay. But you're expecting that to -- I guess, continue to run down through the year?

Yes. As loans come due and are refinanced to normal amortization, and for the reasons Tom mentioned, while we are originating loans, it's not enough to offset that natural runoff.

It's difficult to predict because the more significant portion of the runoff tends not to be maturities and [amo], they tend to be refinancings in the marketplace and cash outs. So you're never precisely sure when that's going to occur.

Yes. I mean, we used trailing prepayment rate, but who knows if it's actually going to materialize.

Our next question comes from Erik Zwick from Stephens Incorporated.

And maybe if I start with Leslie, just kind of one more question on the margin. What deposit beta are you expecting as -- in your 2018 guidance?

So we're modeling in the 60s. Hopefully, we're not actually expecting that. But that's what's being modeled.

We've always modeled more than what [is] realized.

Yes.

Okay. And then Raj, you kind of mentioned your focus is really on kind of 2020 as you think kind of mid to longer term. We've obviously gotten certainty around taxes now, covered loan portfolio continues to run off. As you think about the core bank that you've built and continue to build, what do you think is a realistic mid- to long-term target for profitability maybe with respect to ROA or ROE or how you look at it?

Well, in some ways that actually becomes harder to answer now after tax reform because the question as one is wondering here is what will happen to the increased return equity from lower taxes. Are -- as an industry, are we going to compete it away or are we going to preserve it and keep dropping it at the bottom line? And I don't have an answer for that. I certainly, know what I'm hoping for. I hope that we preserve that, and that continues and is permanent and not competed away in the marketplace. But putting that aside, we've always said that this business model, which is not a fee-centric business model, but more traditional lending-based business model, a credit-heavy business model. In the long term, you should be able to get to a 1% ROA and slightly north of 10% ROE. And we expect to get there on a core basis, not just with loss share, but on a core basis, like you said, medium to long term. So that's what we're solving for without the tax benefit. Now the tax benefit, how much of that rolls down to the bottom line? I guess, initially, all of it will; and over time, we'll see how competitive the landscape is and what the marketplace does. It's actually a difficult one to answer. I'm -- I certainly hope that all of that will stay to the bottom line and it'll be a permanent pickup. But I will declare victory only 2 years out, not yet.

That's helpful. That's great color. And maybe one last one, if I could. And maybe for Tom, kind of now that we've got the certainty around tax reform, would you expect kind of the loan demand or the growth at Pinnacle in 2018 would be greater than 2017?

I don't know.

Big question mark.

Too hard to say, yet. We're -- it's too difficult to tell how in any of the tax exposed businesses, how the competition is going to respond right now.

Yes. We have certainty around the tax rate. We don't have any certainty at all about how the market for municipal finance is going to respond to that.

Our next question comes from Steven Alexopoulos from JPMorgan.

This is actually Jason Oetting on for Steve today. When we think about the loss-share agreement expiring in May of 2019, what kind of level of related expenses do you think might be able to be cut when the covered loans are away? I mean, I know it might be a bit early, but at least on a conceptual basis, do you think expenses come down meaningfully? Or would these maybe be reinvested? How are you thinking about that?

Jason, we've always said that while there are expenses related to loss share and they are spread all over the company, it is hard for us to quantify and say that this is the total number. So there will be -- you shouldn't expect expenses to dip like -- this year we're talking about high-single-digit expense growth. Maybe at that time, it's slightly less expense growth for that region, but it's not like it'll be such meaningful decline that you will be able to see expenses going down from '19 to '20. There is expense save, but it's -- they're hard to quantify and we've never actually put a number out there.

Our next question comes from David Bishop from FIG Partners.

A quick follow-up on the deposit side. It looks like there was a little bit of a mix shift going on this quarter from interest bearing checking into money-market savings. Anything going on there related to deposit promotions? Or I know some of your peers out have had some tax planning strategies from some of their commercial clients there. Just curious if you saw any of that transitional shift related to what's happening from a broader tax perspective.

So the answer to that question, because I asked it myself, is actually very pedantic and unsexy. The -- what happened weirdly in the third quarter after -- when the hurricane hit, we had several large customers who thought for some reason that they'd rather have their money in interest-bearing checking accounts than in money-market accounts, they moved it and they moved it back. Now I don't really know why they thought that, but it did happen. So it wasn't -- I don't think we've really seen a significant shift in mix. It was more just that kind of one-off activity by a couple of large customers.

Okay. Okay. And then in terms of just quarter-over-quarter deposit pricing, interest-bearing deposit costs. It looked like a pretty similar basis point move in terms of the cost of those deposits. Are you seeing -- and that remain consistent as you head into the early stages of 2018 until -- should we project sort of a similar trend? I guess interest bearing up to about 10 basis points the past couple of quarters, savings money market up about 9 or so. Do you expect that sort of trend to continue?

I'd rather not get into a quarter-by-quarter analysis. Usually, you should expect an increase in cost of deposits simply because these rate moves could affect -- they could happen towards the later part of a quarter, which it did this time as well in December. Some of that impact was felt for the month of December. Some of it will -- is still growing through. And this quarter, you'll see the full impact. So there will be some of that, but I'd rather not get into the line-by-line analysis on that on this call.

And I am showing no further questions at this time. I would now like to turn the conference back over to Raj Singh for any closing remarks.

Thank you. Once again, we're very happy with the way the quarter turned out. We're very happy with the way the year turned out. We're looking very optimistically at 2018 and beyond. And with that, we'll sign off and we'll talk to you again in 90 days. Thank you so much. Bye.

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.