BankUnited Inc (BKU) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankUnited, Inc. 2018 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Lisa Shim, SVP, Head of Corporate Development, Strategy and Marketing. You may begin.

Thank you. Good morning, and thank you for joining us today on our First Quarter 2018 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 these 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. Thank you, everyone for joining us. I'll go through a few bullet points, hand it over to Leslie and then to Tom, and then we'll open it up for questions.

We had another strong quarter. Earnings were at $0.77 per share, I think that compares to $0.57 per share we had at this time last year. Also, I think the estimates were for the low 70's, I think $0.72, around that. So we're feeling good about the way the earnings came out.

The net income was $85.2 million, which is a 35% increase in earnings when you compare it to first quarter of last year. Now obviously the earnings were helped by the tax law change and our lower corporate tax rate. So if you back that out and just look at pretax income, that increased to 23% over the comparable quarter in 2017.

And as you will dig deeper into the numbers and pull out sort of non-loss share earnings, you'll see that number also increased something in the same neighborhood.

So all across the board no matter how you look at earnings, this is a very good showing in the first quarter of 2018.

Going to -- a little deeper into the P&L, net interest income after provision for losses for this quarter was at $245 million almost, which was a $26 million increase, which is 12%. Cost of -- the NIM actually went up this quarter from fourth quarter of last year. As you know, our NIM is impacted by the runoff of loss share assets, and the NIM actually has been coming down steadily every quarter as those assets have run off, but we actually saw an increase in NIM by 4 basis points from fourth quarter. So NIM stood at 3.56%, it was 3.52% in the fourth quarter. Comparable first quarter was 3.70%.

Now this decline -- this NIM was impacted by the sort of the onetime tax hit that we take on our taxi book, which is our pinnacle business. So despite that adjustment, it was still a very strong showing on net interest margin. Cost of deposits continue to increase. They are at 104 basis points for the quarter. They were up about 10 basis points over the course of the last 3 months, primarily driven by higher fed funds and generally a higher interest rate on the short end of the curve, and I'll talk about the curve in a little bit.

We initiated our share buyback program as we had talked about. We got it authorized in January. We initiated it sometime in February. We have purchased about 1.2 million shares over the course of this quarter at -- which is about $48.5 million aggregate purchase price, and buying back stock is dilutive to our tangible book value per share, but we still think it makes sense. We still think our stock is the best thing out there to buy. So we are putting our money where our mouth is and buying back stock.

Despite the buyback and the dilution that comes from it, our tangible book value continues to grow, and it now stands at $27.83.

Talking about loan growth and deposit growth a little bit. Loan growth is light this quarter, very similar to what you saw, the trend you saw first quarter of last year. Our business has become much more seasonal in nature, and the first quarter tends to be a very slow quarter for us, both in terms of how much new business happened but also in terms of utilizations of lines in our C&I businesses and our mortgage warehouse business, which is becoming a bigger and bigger part of the balance sheet.

So loan growth was $74 million, leases actually declined by $8 million, net number is about $66 million. We have often talked about the better way to look at our growth. Instead of looking at any one quarter, to look at trailing 12 months, we'll continue to say that. That actually holds for loans and deposits. So if you do a 4-quarter look-back, our growth for the last 4 quarters has been about $2.1 billion, which is about an 11% run rate.

To give you a little more color in terms of what we are seeing in loan growth, and Tom will talk a lot about it, but I do want to make one point, we did see -- our production numbers actually came in stronger than what we had been expecting. So I'm very happy about that, but our payoff and paydowns also came in much higher than what we had predicted. So that net $66 million number is made up of 2 very large numbers in terms of money coming in and money going out, and both those numbers were elevated. One is great because we're doing better production than we even thought we would, but I'm also looking at higher payoffs and paydowns, which I think is largely driven by how healthy the economy is. People are flush with cash, people are selling their companies, people are selling their properties and buildings, and we're seeing that trend almost across the board.

Deposits grew by $361 million this quarter. Again, if you'd look at it 4-quarter trailing basis, over the last 4 quarters, we grew deposits by $2.3 billion, which is about a 12% growth rate. A trend that we have been waiting for and not seen in our deposits for a while was a meaningful growth in DDA. I think all of last year, we grew DDA by roughly $200 million. This quarter alone, our DDA growth was $270 million, on a roughly $3 billion book of business. That kind of growth is pretty impressive. I don't want to make projections off of that because it's very hard to project deposit growth, but we'll celebrate the success that we've had this quarter, of $270 million of that $361 million being DDA growth.

Credit remained strong. Taxi is still the only sore point, and we will give you an update, Leslie will do that in a few minutes. In terms of the -- before I turn it over to Leslie, let me talk about 2 things which are not in our control. One is the economy, and the other is the curve. The economy is strong. It's about as strong as we have seen it, and while we are not economists and cannot predict too far out in the future, at least in the short term, from what we see, both in New York and in Florida, the trends that we see in our portfolio, the information that we get from our customers, the deep look we get into their businesses, you couldn't ask for a stronger economy than what we are experiencing right now.

The curve on the other hand is as flat as it has been. It's not completely flat, but this is pretty close to being completely flat. And when I talk about the curve, I don't talk about the yield curve, the Treasury yield curve. We look more at the swap curve, and the swap curve, for whatever reason, is even flatter than the Treasury yield curve.

So that makes for a competitive environment, and we are very aware of that. Our pipelines right now for loan growth, deposit growth are strong, but we keep as much of a focus on volume as we do on pricing. And if we see things get tighter where margins are just not there, then we may pull back on growth, but we're not announcing that yet. But it's something that we'll continue to monitor, and if this curve inverts, which I hope it doesn't, it will -- pricing will come under a lot of pressure.

So that's sort of the only negative news I have, but everything else, the economy is doing very well, credit is strong, and inside the company, we're feeling pretty good about -- just about everything, except the curve.

With that, I will turn it over to Tom actually. Tom, and then Leslie will come after Tom. Tom?

Great. Thanks, Raj. So just to elaborate a bit more on some of the themes that Raj talked about. From a loan perspective, overall, our portfolio continues to be well diversified across all of our platforms. Florida now accounts for 35% or $7.4 billion; New York, 29% or $6 billion; and the national businesses, 36% or $7.6 billion.

As Raj mentioned, we did see -- and this is -- this comment holds pretty much true across all of our business lines, we did see very good new production for the quarter. We did see a much larger level of asset sales, business sales, and just as our business becomes a bit more C&I-dominant, you do see more seasonality. Particularly, Q1 is coming off of what is typically the year ending for most large C&I businesses. So a 4% to 5% difference in utilization rates is more impactful for us, particularly in a first quarter, which is typically lighter in your large C&I businesses.

So if you look kind of group-by-group, I'll walk you through a bit of that. Loans for the quarter in Florida grew by $55 million, most of that was in the C&I businesses; the national platform grew by $158 million; then the New York business declined by $139 million. We look kind of at each of the businesses in a little bit more depth, and the national platform and the residential portfolio grew by $165 million. Our pinnacle municipal business actually declined by $8 million. The first quarter was kind of an interesting time to see the tax effect work its way through the market in terms of pricing and where corporate players are versus individual players. We're kind of taking a bit of a wait-and-see look at how pricing develops in that market, expect to see it improve for us as we go into future quarters, but first quarter was a fairly slow quarter in that business because of a lot of those changes. Our bridge finance business, actually a good quarter, $36 million in total loan growth and lease growth, $23 million within our franchise and $13 million within our equipment business.

Another kind of seasonal take is our mortgage warehouse business, was down $35 million as we expected due to the seasonality in mortgage warehouse commitments, but total commitments at $331 million were $963 million, and have actually increased $75 million since the close of the end of business for quarter. So we're now over $1 billion in total commitments within that business.

The New York multifamily portfolio declined by $121 million for the quarter, while other CRE in New York grew by $26 million. Now again, Florida and C&I grew by $53 million and the CRE book was relatively flat, predominantly due to asset sales.

On the deposit side, total deposits, as Raj mentioned, grew by $361 million for the quarter. It was fairly nicely spread around, driven primarily by commercial deposit growth.

In New York, the national franchise had a very strong quarter in the retail Florida. So that kind of sums up some more detailed discussion of loans and deposits. So with that, we'll turn it to Leslie.

Thank you, Tom. So giving a little bit more color on the quarterly results. The yield on interest-earning assets was up to 4.70% this quarter. That's up from 4.56% linked quarter and 4.52% for the comparable quarter of the prior year. We saw increases in yield on both noncovered and covered loans as well as on investment securities. The yield on noncovered loans increased to 3.83% for the quarter, up from 3.62% for the comparable quarter of the prior year. It should -- I want to note, we've -- Raj mentioned, the impact on the reported tax-equivalent yields of the change in the corporate tax rate. The tax-equivalent yield on our noncovered loans was impacted by 8 basis points and on our investment securities by 10 basis points due to that change in the tax rate. So that kind of quantifies the impact of that for you.

The cost of deposits, up 10 basis points to 1.04% from 0.94% linked quarter. And as Raj emphasized earlier, the NIM actually did increase by 4 basis points linked quarter, although declining from the first quarter of 2017 due to both a higher cost of funds and the continued runoff of the covered loans.

The NIM itself was impacted 8 basis points by a change in the tax rate. The combined yield on the FDIC asset and the covered loans for the quarter was 20.75%, and we expect that to ramp up to about 28% for the full year as of now. Taxes, you saw the ETR come down to 23% compared to about 31% for the first quarter of 2017. Obviously, that's all attributable to the change in the corporate tax rate, and we did benefit from that.

A couple of comments on the reserves and the provision. The total provision for the quarter related to noncovered loans was $2.9 million, down from $11.3 million for the first quarter of 2017. So the lower provision resulted primarily from a lower provision related to taxi medallion loans. The provision related to taxi was down $6.7 million from the first quarter of the prior year. We also had lower provisions related to specifically identified impair loans -- impaired loans and lower loan growth.

Overall, the decline in the reserves, couple other things going on in there, we're seeing historical net charge-off rates that inform our provisioning continue to decline for some commercial segments. We also took charge-offs this quarter related to taxi that reduces the amount of reserves, and residential loans comprised an even larger percentage of long growth for the quarter, and obviously, we provision at a much lower rate on residential loans than we do on commercial loans. So all of those things impacted the total reserve level for the quarter. We have not changed our ALLL methodology, it remains consistent with what it had been.

Looking forward with provisioning, outside of taxi, which I'll talk about in a minute, given that the economy looks good, and we really aren't seeing systemic indications of credit weakness in the portfolio, I would expect provisioning to be driven largely by loan growth. And then just the periodic, occasionally you have a loan that pops and something goes wrong, and you have to provide specifically for that loan.

But other than that, I don't really expect any changes in the trend. To give you a quick update on taxi, total exposure is now $98.4 million, down from $106.1 million at 12/31. That reduction is due to $5.4 million in charge-offs and $2.3 million in paydowns. We did slightly update our methodology for determining reserves on taxi this quarter. As you know, we've historically used a cash flow template-based methodology for reserving for the taxi loans. We continue to use that methodology for the portion of the portfolio that is paying regularly. We have taken the portion of the portfolio on which we're not receiving regular payments and started reserving based on a -- we're currently using a 5-month average of reported transfer prices off the TLC website. So that's a slight change. The cash flow template methodology solved for a valuation of $295,000 this quarter, down from $304,000 last quarter, and we maintain an additional 15% haircut on that value as a reserve. So that solves for around $250,000.

The 5-month moving average of reported transfer prices was $239,000, and that's what we applied to the delinquent portion of the portfolio.

Total delinquencies are now $19.7 million, and $7 million of that is over 90 days. And to date, cumulatively charge-offs have totaled $73.2 million, and I remind you that the entire portfolio does remain on nonaccrual, even that portion on which we're receiving regular payment.

Now the question about the future. I don't know, obviously, there's still a lot of uncertainty. There may be more pain to be taken over the next several quarters with respect to this portfolio, but again, at now less than $100 million, the exposure remains relatively contained.

A couple of updates to guidance. I -- we're now forecasting the net interest margin for 2018 to be between 3.50% and 3.60%, still expecting high single-digit expense growth excluding the amortization of the indemnification asset. And some numbers that people always ask for, the future estimated accretion on covered loans as of 3/31 is -- now is at $406 million and $131 million in estimated amortization of the indem asset is net of a marginal tax rate of 26.5%, that's the -- just over $200 million in expected earnings in the future off of that asset.

That's all I've got to say, and then turn it back over to Raj for any closing remarks.

Thanks, Leslie. No, I'll just end it by saying, we're feeling good about this quarter we had. It was very strong in earnings. It was a light quarter in growth, but that is something we had expected. I just want to remind everyone, last year we had about I think $100 million or so in loan growth in the first quarter and the second quarter was $850 million. So do not take 1 quarter and annualize it. Try and look at a longer 4-quarter average or something like that. I think it's a better indicator of truly what the growth rates are.

And I'm feeling very, very good about where the economy is, almost a little too good about it because I fear there may be a risk of overheating, if anything. And we'll continue the mission here, and pipelines are good and strong. Even on the hiring front, we are actually -- we will soon be announcing, not yet announced, but in a couple of weeks announcing some more hires on the production side. So generally, feeling pretty good about everything.

And I will now open it up for questions.

(Operator Instructions) And our first question comes from the line of Ken Zerbe from Morgan Stanley.

Question, in terms of your margin, as we think about -- so forget margin over the next, I'm going to say, next year, right. Can you just talk about the improvement of the core margin because obviously sort of the pace of where your NIM is at, after the FDIC asset rolls off completely? Like what are you doing on the loan side, on this deposit side certainly to help get your core margin ex FDIC better than where it is today?

I think, Ken, number of things, right. So on the landing side, we -- as we brought our loan growth targets down, we are now doing -- on the margin, doing much better in terms of spread than we were, let's say, 1.5 year or 2 years ago. On the deposit side the world has changed dramatically in the last several quarters. Deposit business used to be -- if you go back before the Fed started raising rates, it used to be a negative-spread business. Fed funds were at 0, and we were paying 50, 60 basis points. In fact, every bank was paying something for deposits, and every bank was technically losing money on deposits. Today, spreads are positive. Yes, the cost of deposits have gone up from 60 to 104 basis points over the last 18 months. However, fed funds is now approaching 1.75% or soon to be 2%. So technically, you are making more money on the deposit side. For us, the biggest lever is going to be cost of funds on the deposit side. And cost of funds on the deposit side is going to get driven most -- the most important driver for that is going to be our mix of deposits. We have only 15%, roughly, DDA to total deposit ratio, which is low for a commercial bank. And last year, our DDA didn't really grow that much. We grew $200 million in all of last year on a 200 -- on a $20 billion book of deposits. That was not good enough. So this year, we have changed incentive plans. And I think you're seeing some early hits from that already with the amount of the DDA growth that we've had. Like I said, it's hard to predict and hang your hat on just 1 quarter. Time will tell how much we're able to do. But we are focusing, we're paying people more on DDA and less on interest-bearing deposits, and I think that'll start to take in -- that will start impacting our deposit mix over the course of the next 4 to 6 quarters as loss share runs off. So short of dramatically entering a new business that has different margins, you're not going to see an immediate change in the margin trajectory. It's going to be slow. We have our eye set on 2020 as sort of the year in which we are standing sort of on our own 2 feet without loss share benefit. And we are laser-focused on trying to get -- pull all the levers to get the margin in a better place than it is today. And it is happening, it's just very hard to see because of the all the noise from loss share.

That is true. Okay, no, it makes -- that makes sense. And then in terms of the buyback...

Well, can I -- I also want to be realistic over here. Margin is impacted by the slope of the curve. That's stuff that is beyond our control. So in 2020, if the curve is very different from what it is today, if it's much -- it has much more slope to it, margin will be much better. God forbid, if it inverts, then it'll be tough, and that's true for everybody.

Yes. Yes, no, exactly, I was going to say it is true for every bank. I think it's more just you versus other banks, and how you compare, and how you're narrowing that gap. Your answer totally makes sense. Other question, in terms of buybacks, the $150 million authorization you guys have, can you just talk about the timing of when, because obviously you did close to $50 million this quarter? Is this something you can finish up over the next couple of quarters? Or -- like how are you thinking longer-term about buybacks?

We haven't really given any guidance on how we would do this. We're trying to maintain flexibility. So I am a believer in dollar-cost averaging, just as a general statement, I will say that, the company is generally -- has that philosophy. And -- but a 1/3 of it is already done. So by that standard, maybe a couple of quarters, maybe a little sooner or a little longer. It'll -- to some extent it depends on what kind of disruption there is in the marketplace and if we can benefit from that. God forbid, if there's some kind of crazy trade war or some other political news that drives the stock market down, then we'll be a little more aggressive and vice versa.

Got it. Okay. And then just a last question in terms of loan growth. I think I heard everything you guys were saying about don't carry out this quarter's trend. But I didn't hear you mention anything about the 10% to 15% prior loan growth guidance. Is that still a reasonable expectation for 2018? Or are we just starting off a little bit at the lower end of that range?

No. What I had said was, look at the last 4 quarters and use that as a proxy of what our run rate is. So I think the loan growth over the last 4 quarters, we're running at about 11%, for deposits we're running a little higher at 12%. So I feel comfortable in that kind of a range, subject to where pricing is over the course of the rest of the year.

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

Let me just follow up on the deposit side, can you give an update on how the wholesale team has been doing? Are they starting to see some of the traction? And is that generating some of the growth in the DDA side?

They hate being called the wholesale team. We call them the national deposits team because their business is actually very similar to other commercial businesses we have. They just tend to have a geographic focus outside of New York and Florida. That's how we've divvied up the business. But they are doing well. We have not disclosed really what each team's numbers are, but they came in and at a pretty decent year in 2017, on top of a very strong first 6 months in 2016. So they're coming up on their 2nd-year anniversary. I'm actually with them all day on Friday. In Westchester, the business is doing well. The goal for them this year, which was not a goal last year or the year before, is to grow DDA. Their DDA balances are still lower than both Florida as well as New York on a percentage basis, and this year, they are being incented to increase their DDA as a percentage of total deposits. That's the only big change, and they are focused on that, and I'm very, very positive that they will deliver on that as well. It will take a couple of years before they can come up to the same level as Florida and New York because the first 18 months, we've been just wanting to get momentum, and DDA balances were in the 6%, 7% range. I expect them to double that this year.

Okay. And then looking at the New York market, you seem pretty optimistic on the economy. I guess, what are you seeing that's driving that optimism? And then as we look out over the year, do you really expect C&I lending to be the primary driver of net growth at -- in the New York market?

Yes. My optimism -- shareholders often ask me, what charts are you looking at and what data points are you looking at. And I point to the fact that rather than looking at charts put out by economists or regulators, the Federal Reserve or what have you, we often tend to look at the information we're getting on our portfolio. We're required to do annual reviews on every loan out there on the commercial side, and we do covenant checks every 3 months on our portfolio. So we're getting a lot of information from our customers, and that tends to inform us more than publicly available data that we all see. So this is the time of the year when a lot of the data starts to come in, year-end stuff, and we're reviewing that, and that's where I'm drawing my optimism from more than anything else. And I'm also seeing customer behavior in terms of what Tom was talking about, in people selling their businesses at prices that they're very happy with or selling buildings at prices that they're very excited about. That's not good for loan growth, but it's actually really good news on the credit side. So internally, in the bank, when a loan pays off, I see the credit guy is smiling, and I see the business guy is not so happy. But overall, it's actually good news because it is an indicator of the strength of the economy and the strength of the credit book.

Okay. And just finally, you had made reference in the release to an increase in the multifamily nonperformer, what was driving that? Is that more cash flow basis? Or is that a temporary impairment?

So this is really a couple of loans that were repositioning-type loans. We made the loans with the knowledge that some renovations were going to be done to buildings, and they were going to be repositioned to be stabilized, and that just hasn't gone as...

Flat.

As well or quickly as was originally planned. The loans are actually current, and we are very comfortable. The LTVs are very low, but the stabilization just hasn't proceeded according to plan. So that's why we've moved them into criticized status, while we monitor them and finalize an exit strategy. But we're not really concerned about losses.

Our next question comes from the line of Brady Gailey from KBW.

So Leslie, you talked about the provision really being driven by loan growth. I know if you look at the loan loss reserve for new loans this quarter, it fell about 4 basis points, from 69 basis points down to 65. Any color on how you think that ratio will trend as you guys grow loans?

I don't really expect it to change much, Brady. It might go up a few -- go back up a few basis points, but I would expect it -- given that we don't see anything happening in the economy or anything evolving in the loan portfolio that we're not seeing today from a credit standpoint, that 65 to 70 seems about where I would expect it to be for the near term. Obviously, looking forward more than a few quarters, it's really hard to say what might develop, but I don't see that moving a whole lot from that 65 to 70 range. Mix can also change that. If the mix shifts more towards commercial and less towards residential, it'll go up a little bit and vice versa.

All right. And then, Raj, if you look at what's happened in banking on its multifamily book, I think when John was CEO, it was, I don't know, maybe 20% or so. Now it's under 15% of loans, it shrank again this quarter. Is there a number that you have in mind as far as where you'd like to see multifamily loans as a percentage of total loans? Like is this thing going down to 10%? Or are we close to being stable as a percentage of the overall loan book?

Brady, I don't solve for targets like that. I solve for what kind of straddle return am I looking for that would get us interested in growing that portfolio. We still are not seeing the kind of spreads that I think we need to see before we put on that particular credit risk on the balance sheet. There's been slight improvement, just a slight improvement in the coupons that you are -- we are quoting at 4%, sometimes 4 1/8. And still, we lost a deal the other day at 4 1/8 because somebody was willing to do it in the high 3s. So the market is still in the 4% or high 3s, maybe 4 1/8% range. If you think of that on a spread basis, a 5-year swap this morning was at 2.95%. Okay, to do a loan at 3.95%, that's a 100 basis point spread, and it's hard for me to say that, that is actually a good place and despite how -- whatever you think of credit, that's just a very, very tight-spread business. So I'm glad that we have other avenues to grow and are not entirely dependent on -- in that one asset class, but pricing is very tight in multifamily.

Brady, I would also add it's not just a rate issue, alone by itself. It's also a structure issue because when you look at the market today, what we see in terms of payoffs and refinancings, it's primarily going to the long-term market to the CMBS market to the agency market and to the lifeco market. So they are in for very long-term fixed-rates, they're in for...

IO period.

IO.

Significantly long IO periods of time, 10-year, IO-type periods of time. So the structure that's out there in the market today is not really a bank product structure.

All right. And then, my last question is for Raj.

Brady, just to finish your question. If we change -- if we see a change in the marketplace where a structure starts to come back which is more akin to what our balance sheet can take, and pricing gets a little bit better, spreads get a little bit wider, you will see us do more multifamily. It's not like that we have some kind of a -- like okay, we will not do any multifamily. We're constantly looking at deals and deciding to pass on them or bidding at numbers that we are not winning. So we're actively participating. We know where the pricing is. We know where all the players are. We're just waiting for the market to adjust, and it's hard for me to say whether that'll happen in 3 months or 6 months or if it'll happen at all. But if and when that happens, you will see us grow multifamily.

All right, that's helpful, Raj. My last question is really kind of a big-picture or strategic question. I get asked often about BankUnited as a potential seller, just with the SIFI threshold potentially going higher, maybe that opens up the door for big bank M&A. I think one of your neighbors is for sale down there right now.

Maybe just how you think about when the time may be right to partner with a larger company, Raj? And I know it gets easier for you all to do something once the loss share expires, do you feel like you have to wait until next May to seriously think about this?

So Brady, you've heard me say this time and time again, I'll repeat myself, we're building the company and the way we build it is with the assumption that we will have to run this for 100 years, and we're happy to do it. That's how you build a truly good and strong company. But we are a public company, we have a fiduciary responsibility to listen to any kind of credible talk on the M&A front. And we're always open, and we welcome that kind of conversation. What we don't do is actively go out and solicit that kind of conversation. So I won't comment on any other deal, not my place to say. But we are building a very, very strong company, which will be very valuable over the long term, and I feel very, very strongly about that. But we don't, on a day-to-day basis, think about a deal because if we do that, that's no way to build a company or run a company.

And our next question comes from the line of Steven Alexopoulos from JPMorgan.

Raj, I wanted to make sure I understood what you were announcing on loan and deposits in terms of the guidance. The prior guidance was 10% to 15%, and you've said a couple of times, just look back at the prior 4 quarters, 11% to 12%. Are you saying that, that's a more realistic range we should be thinking of for 2018?

No, I'm not saying that. What I'm saying is rather than using first quarter and multiplying them by 4 and using that as a proxy of what our growth rate is currently, a better way to look at this is, look at the last 4 quarters and say what is that growth rate, and that's a better indicative of where we are today. I still think looking at the pipeline, which is what I use to give guidance on, what we think we can do, I'd say -- I would still say 10% to 15% is what we're shooting for. That's what's in our budget, that's what is in peoples' incentive comp plans, and that's what -- how we are accruing those incentive dollars. So it's -- I know it's a wide range, 10% to 15%, but that's about as good a guidance I can give. I'm not talking you down to 11% number.

Got you. Okay. And then for Leslie, looking at the net yield on covereds of 20%, which ran for 10% for many years, and now it's basically doubled, why is this now suddenly rising at such a rapid pace?

So it's really just how the math works with a negatively amortizing indem asset and positively accreting loans. What's happening is the indem asset, which is the negatively -- negative-yielding part, is becoming a smaller percentage of the total and loans, which are the positive part, are becoming a larger percentage of the total. I mean -- and it's just how the math works, and it's a product of the fact that over time, the expected resolution of these loans, or expected cash flows to be generated from these loans has just continually increased at a pretty rapid clip. So the combination of those 2 things just mathematically gets you there. Again, we're trying to steer people away from trying to figure out all the moving parts and focus on the total amount of income that's going to -- that we believe is going to come in over the remainder of this term, which, as I said earlier, now sits at right around $200 million. And to worry less about which quarter it's coming in and which line it's going to run through and to kind of think about it that way, is an easier way to model it out, I think.

Yes, okay. That's helpful. And then maybe one final one. On the noninterest-bearing deposit growth, just about every bank is reporting a pretty sharp seasonal decline in noninterest-bearing. Can you give more color on why you saw such strong growth this quarter?

I think we changed the tone in the company late last year by basically sort of rallying around okay, DDA growth, and you did a big campaign in the company in January about what's important and what we've got to focus on, what's priority 1, 2 and 3, and it was all DDA growth. So there is a changed mood in the company, and people are -- people knew even before they got their incentive plans for this year that there'll be a big change in how we pay people, and I think you're seeing some of that. Some of it is just one-off stuff, Steve. So like I said, don't take that $270 million or $300 million, whatever the number is, and think that oh, we'll get that every quarter. It is not a trend, 1 quarter does not make a trend. So some of it is just more -- or I think the average balances grew by...

$145 million.

$145 million. That may be a better number simply because that takes out that one-off business that comes in and then switches into another account or goes out a few days later. So it is still a better showing no matter how you look at it, whether it's average balance growth or it's period-end average -- period-end growth, but we are focusing a lot more on DDA. We're making a lot of noise inside the company about that. Everybody who brings a -- any kind of transaction to the table, whether it's a loan or a line or a -- we hire a vendor, for crying out loud, the first question that gets asked is, did we get their DDA or not? So there is just that sort of battle cry that we changed in December. We really have pushed that through the company, and we continue to do that, and I think it's showing some early results.

And our next question comes from the line of Stephen Scouten from Sandler O'Neill.

A question for you, maybe on, on what you're seeing on the pricing front. I know Raj, you mentioned still some tight pricing on some of the multifamily, but have you seen any material changes in terms of what folks are being willing to offer after the impacts of tax reform? I mean, do you think those with ROE-based pricing models have adjusted tax rates and are thus offering the same spreads? Or are they taking that excess earnings power and then getting even more aggressive on the pricing front?

I think the answer is a little mixed. You would think that like our -- in our pinnacle business, which is a tax-free business that the tax rate change would just go through in 1 day and everything should autoprice appropriately on January 2, but that's not what happened. We are seeing some -- on both sides where -- the old tax rate is still sticking in people's mind for good and for bad, but we have seen some places where people are beginning to solve...

Anything (inaudible) special for the month (inaudible).

Leslie is whispering in my ear that JPMorgan special for the month are probably based on giving away the tax benefit. So we are seeing some large banks getting very aggressive on business banking-type product and are doing spreads that we've not seen them do and wondering if that is because of the tax rate change and them solving to an ROE. Internally we're -- the way we decided to attack this was to try and keep everyone focused on pretax numbers so that the tax number doesn't come up, the pricing models don't change. But it's a mixed bag out there in terms of who is doing that and who is willing to give away the tax benefit.

Yes, that make sense. And would you say the same holds for deposits? And as a result, would you think from here that the quarter-over-quarter increase in your funding cost would begin to accelerate, even more so than what we saw on that 10 basis points this quarter?

I think it's been -- our last quarter was also about 9 or 10 basis points, this quarter is about the same. June is pretty much baked in so I think you'll see a similar kind of number. But it is -- yes, it has been going up. I think as you get further and further up, more customers get price-sensitive and there is pressure on -- to use the term beta -- on betas to get higher. So I don't expect that -- for the number to go down. I don't know how much it'll go up or if it will stay flat. My expectation is it will be flat to up, but not -- the price sensitivity of our clients is not going to go down with each Fed increase. And I think that that's true pretty much across the board with all banks.

And then last one for me, just on expenses, Leslie, I know you said kind of still single digit kind of expense growth year-over-year, ex the indem. But there we've seen a kind of a sizable jump in salaries and maybe a noticeable jump in kind of other. Anything unusual in those line items? And any new hires that draw salaries or do we just have that one pending potential announcement, Raj, that you spoke of?

I mean, FTEs are certainly up year-over-year. If you're comparing salary expense this year to last year, FTEs are up year-over-year and will be up year-over-year again, the company is growing. But in the first quarter, there is at least a -- there's about a $5 million, a little over a $5 million impact of just things like payroll taxes, HSA seeding, 401(k) contributions, that are always higher in the first quarter of the year because nobody's reached those payroll tax caps yet. So that had an impact on Q1 as well. In other, it's really just cats and dogs. I don't know that I would necessarily see that as a trend.

And our next question comes from the line of David Bishop from FIG Partners.

Yes, that -- actually this -- all my questions have been answered.

And I'm currently seeing no further questions. I would now like to turn the call over to Mr. Raj Singh for closing remarks.

Thank you everyone for joining us. I'll end by saying, we're happy about the quarter that we've just posted. I'm not sure if it's the strongest ever but it certainly is one of the strongest in the last several quarters. We're feeling good as we enter into our second quarter, and we'll talk to you in 90 days again. Thank you. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may now disconnect. Everyone, have a great day.