BankUnited Inc (BKU) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankUnited Inc.

2018 Second Quarter Earnings Conference Call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to turn the conference over to your host for today, Senior Vice President, Lisa Shim, Head of Corporate Development, Strategy and Marketing.

You may begin.

Thank you.

Good morning, and thanks for joining us today on our second 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 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.

I would like to start the call by congratulating [Kent Albert] on getting his deals finally done, and I also want to thank everyone for joining us.

I know that, that call is going on at the same time.

So I'm sure that's more exciting than our call.

Well we think ours is exciting, but I understand -- we're looking at the screen as to how many people are joining our call, and it's a little less than what we usually see.

Hopefully as the call goes on, we'll see more participants join.

But thank you and welcome to our earnings call.

I'm very happy to report another very strong quarter, $90 million in earnings, $0.82 per share.

I think we're about $0.05 ahead of street estimates, so always happy when that happens.

Earnings this time last year were $0.60 a share, about $66.5 million, so that's a pretty impressive 37% growth in EPS.

Now, as of the end of last year, we started talking to you in some detail around non-loss share earnings, which is earnings by backing out the contribution from -- or the revenue contribution from the loss share assets.

And you will see that, that number also grew impressively.

I think last quarter it was $0.54, this quarter it's $0.59, which is 9% growth just over the last 3 months.

So if we continue on that trajectory, we'll be in a very good place and that's -- I'm very happy to report that.

Now before getting into the numbers, let me give you a little bit of a macro view.

I always like to do this on calls, talk about things that we respond to, that we don't control, but we respond to.

That's the environment, that's the economy and regulation and so on.

So I've roughly divided into 3 categories: there is the economy; there is the regulatory and legislative environment; and third is the rate environment.

When it comes to economy, the best way I would describe it is I have the optimist sitting on my right shoulder and the pessimist sitting on my left shoulder and the optimist [orally] argues that, look around, life couldn't get any better and the pessimist says well that's exactly what I'm afraid of . So the economy is very, very good.

Having said that, we know that we have to be very, very careful in assessing where the economy is headed not just where it has been or where it is.

We don't see anything on the horizon as far as we can see that would cause any concern.

We're not seeing any trends in our portfolio which would cause any concerns, but we always stay very vigilant.

So economy is very good.

Second, on the legislative front and the regulatory front, things are getting much better.

As you all know, with the passage of Crapo Bill, well, it doesn't impact us on a -- in the near future or on a day-to-day basis, it will have meaningful impact as we grow the balance sheet and get past $50 billion someday.

So that was -- so both those things, the economy then the legislative and regulatory environment, are much to celebrate about.

The rate environment is tougher than it was this time the last quarter when we spoke to you.

The curve, while it is not totally flat, it's getting pretty flat.

So two out of three is not bad and I'll take those two any day, especially the economy, since that's sort of the primary driver of banks' health.

Now coming back to -- so these 3 macro things, how are they impacting what's happening in the marketplace?

Let me talk for a minute about that.

Starting with the lending side, what we're seeing in our various lending businesses, if I was to divide them into 2 broad categories and say, fixed-rate lending and floating-rate lending.

Fixed-rate landing is under tremendous amount of pressure, spreads are very tight and I would say, in some places, they are irrationally tight.

Floating-rate lending is a different story, while spreads are a little tighter, they're not irrational, there's still good business to be done and we are, as a result, focusing more on floating-rate lending, rather than fixed-rate landing.

Now what falls into fixed-rate lending is commercial real estate, including multifamily.

It's single-family, residential, it's some of our national businesses like Pinnacle municipal finance and so on.

And you will see as we get further into the call, we'll describe where the growth was, it was, and you will see a very clear demarcation, between growth being focused more on floating-rate businesses and much less so, in fact, negative in some areas, of the fixed-rate businesses.

Deposit side, the competition is tremendous.

It has been for some time, and it is pretty universal.

It's not a Florida issue, it's not a commercial or a consumer issue.

We're seeing very aggressive competition emerge from players, not just small or medium-sized, but even large companies are now getting aggressive, companies that we would have not thought as really price-driven, deposit gatherers are now getting in the game in a big way.

So deposit competition is fierce, and -- in the national business, in New York and in Florida, and we'll talk a little more about that when we get into our numbers.

So this quarter, let’s get into numbers side.

Our earnings, net income -- net interest income came in at $246 million.

Margin -- net interest margin actually grew from 3.56% last quarter to (inaudible), and Leslie will get into the details of that.

Last year, at this time, it was 3.76%.

It has been on the decline for as long as we can remember, but this quarter we actually ticked up, and it's a result of some loss share yields improving, but also our core business getting stronger and better.

Deposit costs increased by 15 basis points.

They went from 104 to 119 basis points, mostly because of the Fed increasing rates or continuing to increase rates.

We see that trend continuing into the future, as long as the Fed is going to hike, which it looks like they will for the rest of this year and pretty much for all of next year.

Deposit betas have increased, as they have every quarter.

They are running meaningfully higher on commercial business as compared to consumer business.

Tangible book value per share now stands at $28.44, that's about a 21% increase from a year ago.

So we're very happy about building tangible book value per share.

Talking about loan growth and deposits.

Loan growth came in at $431 million, the breakup of that, Tom will walk you through that in a minute.

Deposits actually shrank this quarter by $62 million and again, it's pretty -- the competition is pretty much fierce across the board.

It is not one area of the back that I could say is -- that fell behind.

It's just been -- it's been pretty strong competition.

There have been some trends within this, which Tom will get into, where we're seeing some positive news, but I don't want to take Tom's talking points here.

In the pipelines for next quarter and the quarter thereafter, we had our pipeline meeting as recently as Friday, and we have a pretty decent view of where loans will be for the next quarter and a somewhat less clear view of where they will be in fourth quarter.

What I will say is, while we have said to you that loan growth will be between 10% and 15%, it looks like loan growth will come into high single-digits, and deposit growth will also be in the high single-digits.

Now we have a very high level of confidence on loan growth, because pipelines are much easier to predict.

You know exactly when loans are going to close, you have a calendar and they generally stick to it.

The deposit pipelines are much harder to predict, because while we know what the deposit pipelines are, we know what mandates we've won, where the deposit is coming in from, the timing can be very difficult to pin down.

But as of Friday, our best guess right now is single digits and high single-digits.

Quickly talking about credit, the story is the same that you've been hearing from us for the last many quarters, which is outside of our taxi portfolio, asset quality remains strong.

Taxi, which is now down to some $87 million or so, is still the pain point that we continue to feel.

Our nonperforming loans -- our noncovered, nonperforming loans were at 87 basis points and of that 87 basis points, 41 basis points was attributable to taxi.

Net charge-off rates for us this quarter were at 21 basis points, again, 13 of that 21 basis points or more than half is attributable directly to taxi.

I really want to take a minute here and talk a little bit about loss share, and as you know we're now in the last year of loss share and it's coming up, it'll end in second quarter of 2019.

We have a 9-month window, which starts sometime in August -- towards late August -- when we get into official discussions with the FDIC, that's what the contract says, in the 9 months that you have to do this, to button down the final loan sale.

So when that happens, what we're vetting right now is are there any loans that we want to hold on to and not sell in the final loan sale.

Our assumption today, as it has always been, and that's sort of the working -- assumption in all of our models, is that we will sell everything.

To the extent that changes, we will talk to you.

It will probably not happen in August, it will not happen until probably September, as we get into discussions with the FDIC, but we will keep you updated.

As of now, all our numbers are still based on the assumption that we sell everything, probably in the second quarter of next year.

Another thing that you will see different in third quarter is our annual loan sale.

As you know, we are -- under our contract, we do -- we have an annual loan selling capacity of about $280 million, we don't do an annual sale, we do 4 quarterly sales.

So every quarter, you've seen for many years now, we sell about $70 million, $75 million of loss share loans.

This time, you will see us do a larger sale, we're trying to get that out of the way in the third quarter.

So that'll be a larger loan sale, probably $150 million, $160 million, in that range, and after that you will not see any of those sales, because we will use up all of our capacity.

The only sale left after that will be the final loan sale.

So with that, I just want to add a little more color on what we're seeing in our loan books and even our deposit books.

I -- And I can best attribute this to just the economy being as strong as it is.

We're seeing a lot of churn.

And what I mean by that is, both in terms of loan payoff and both in terms of the deposit velocity, we're seeing numbers that we have -- we've not seen before.

On the lending side, we're seeing companies that are being sold, we're seeing people trade properties.

And by the way, we're even seeing some refinancing activity, especially in New York, that you would think with the rates having gone up as much as they have, that refi activity would come to a halt, but that's not true.

We're seeing a fair amount of refi activity in New York, we're seeing a lot of asset activity in Florida and that has an impact.

It's good for credit.

The economy's healthy and we're getting -- these loans are getting paid off sooner than we expected them.

But nevertheless, it creates headwinds when you're trying to grow the balance sheet.

On the deposit side, what we're seeing is a clear demarcation in, what I call reserve funds versus operating funds, and that's just my nomenclature that I came up with.

When companies have parked money here -- and there are instances where they have parked money here for 3, 4, 5 years -- with not much churn in them, we're now seeing that money churn out, people using that money for all sorts of things.

They're buying other companies, they're doing buybacks, they're paying down debt, they're acquiring other things, they're acquiring properties.

So that has created a fair amount of headwind in deposits, not just about deposit pricing and competition, it also is use of funds.

In fact, that is the #1 criteria of all the outflows that we saw in deposits, we brought a lot of new accounts in, but we saw a lot of outflow, which is why the close number was negative $62 million.

And the #1 one reason -- because I'm always very concerned about are we losing business to competition, and time and time again, when we did this analysis we're seeing that, that is not the #1 reason.

#1 reason is companies just using -- or our commercial clients -- using deposits for other things.

And sometimes it is losing deposits to other banks, but very often it's -- they're putting it into financial assets because people are just buying treasuries or munis, which are yielding better than what bank deposits are.

When you can get a 2-year treasury at -- in the 2.60s, it's hard to leave money at a bank at 1.75, for example.

So we're seeing some of that.

But I wanted to just give you a little bit of color around what is happening deep inside the loan book and the deposit book.

For us, this has been -- couple of years ago, we changed the tone of the company and we said okay, we're a growth company, but we'll define growth not as balance sheet growth, but we'll define it as earnings growth.

And that's what we've been focused on, that's what we intend to continue to focus on.

And it always is -- it's very easy to point to quantity on a balance sheet.

It's very difficult to point to quality on a balance sheet and this has all been a game of trying to balance quality versus quantity, because eventually, both those things contribute to earnings growth.

So I would say, look at the earnings growth, it's been very strong this quarter, we continue to predict it'll be strong.

We are taking down the expense that we've given you in terms of loan growth and deposit growth, and by the way, even expense growth, and Leslie will talk about that in a little bit.

But we stay very optimistic about the earnings trajectory of the company and with that, I will turn it over to Tom.

Thank you, Raj.

So as Raj mentioned, we had -- first, I'll cover loans and leases -- we had noncovered growth of $431 million for the quarter.

If we break that down as we typically do, Florida grew by $301 million, our national companies grew by $280 million, while the New York portfolio declined by $150 million, all of that was within the commercial real estate space in New York.

So in Florida -- we talked a little bit about floating-rate debt and our focus on floating-rate debt -- the Florida C&I, and owner-occupied CRE portfolio grew by $305 million.

Most of that was attributable to our larger middle-market banking teams, which generate predominantly floating-rate debt.

Our CRE in Florida did decline a little bit, as Raj mentioned, primarily impacted by heightened level of payoffs, and in Florida most of these were driven by asset sales.

In New York, the multifamily market continued to decline, experiencing net runoff of $215 million as we continue to see few opportunities to put that money out into attractive risk-adjusted returns, especially with what we're seeing in the tightness in the fixed-rate market in the New York market with properties generally going to the agency and CMBS markets.

Like Florida, we did see a good growth in the C&I markets, again, predominantly in our middle-market banking teams, with a $104 million of growth in New York.

In the national platforms, the mortgage warehouse business grew by $104 million, in line with expectations, and continues to be one of our high-growth businesses.

Residential portfolio grew by $89 million and our Bridge Funding Group, which is our leasing and franchise financing organization, grew by $75 million.

There was some growth as well as at Pinnacle, as Raj mentioned, $19 million, although, pricing remains very, very challenging in that market, especially in the post-tax reform era.

New production for the quarter was very strong and in terms of yield, it came in in the high 4% range.

Switching to deposits, while total deposits did decline by $62 million for the quarter, we are seeing some underlying positives.

And to give you 2 examples of that, deposits in our Florida retail network, which is predominantly consumer and small business accounts, grew by a net of a $136 million for the quarter.

Combined, our Florida retail and private client services group grew noninterest-bearing DDA by $58 million for the quarter, which was a good quarter.

The national deposit team grew their DDA book by $86 million in the quarter and over half of this was noninterest-bearing DDA.

We continue to see success with all of our commercial teams in New York and Florida, bringing in core deposit relationships, although it does take time for these relationships to come online to kind of aggregate into our total deposit level.

From a strategy perspective, as Raj mentioned, growth in core relationships, core operating accounts, middle-market type accounts continues to be our primary strategic emphasis across really all of our geographies and all of our teams within the company.

So with that, I'll turn it over to Leslie.

Thanks, Tom.

Good morning.

I want to start with a piece of really good news.

We received word over the last couple of weeks, and many of you probably saw the press release, that Moody's has upgraded the company's issuer ratings from Ba1 to Baa3.

So that's now an investment-grade rating and not only is that a real positive for us with respect to any future preferred stock or debt issuances, we think it'll be a real help to us in onboarding some of the larger commercial deposit relationships that we're seeking.

So that's a piece of good news.

A little more detail on quarterly results.

I'm going to dig into yields and the NIM a little bit.

The yield on interest-earning assets was 4.90% for the quarter, up from 4.70% linked quarter and up from 4.65% for the comparable quarter of the prior year.

We saw increases in yield on both noncovered and covered loans as well as the investment securities portfolio.

The yield on noncovered loans increased to 3.96% for the quarter, up from 3.83% linked quarter, and from 3.78% for the comparable quarter of the prior year.

The tax-equivalent yield on investment securities was 3.33% this quarter compared to 3.04% for the immediately preceding quarter and 3.05% for the comparable quarter in the prior year.

This increase mainly was due to coupon rate increases on floaters in the portfolio and some changes in portfolio composition during the quarter.

Duration of the portfolio remained low at around 1.50%.

As a reminder that the tax-equivalent yields on both noncovered loans and on investment securities, when comparing then to the prior year, are still impacted by the reduction in the tax rate, each by about 8 basis points, comparatively, over the prior year.

Raj has already spent some time talking about deposit costs for the quarter, so I won't dig into that.

We also saw an increase in the cost of our FHLB advances.

Those were impacted both by general rate increases and also by some hedging we've been doing over the past 2 quarters, extending out the term of some of those borrowings, even though that cost us a little bit in the short-term.

As flat as the curve is, we feel like that's a good decision.

Linked quarter, the NIM did increase to 3.60% from 3.56%, but it's down from the second quarter of the prior year, due again to the continued runoff of those high-yielding covered loans, so that's a trend that has been continuing for some time.

Couple of comments on the provision.

The provision related to noncovered loans was $8.7 million for the quarter compared to $12 million for the comparable quarter of 2017.

The provision is quarter-related to taxi medallion loans of $11.1 million, up from $7.4 million for the comparable quarter of 2017.

Overall, the provision this quarter was positively impacted by a reduction in some of our qualitative factors, which more than offset that taxi medallion provision for the quarter.

Quick update as expected, on the taxi portfolio, I can't wait till I get to stop doing this every quarter.

Total exposure is now down to $87.2 million from $98.4 million at 3/31.

That reduction is due to $8.1 million in charge-offs and $3.1 million in paydowns.

We haven't changed anything about our methodology for determining reserves this quarter.

We continue to use our cash flow template-based methodology for the portion of the portfolio that is paying regularly.

And we're using an average of reported transfer prices to reserve for the portion that is not paying.

So where those values landed this quarter, net of reserves: the loans that we're evaluating using the cash flow template are valued at about $210,000 and that's down from about $250,000 last quarter; and loans that we're evaluating using average transfer prices, net of reserves, we now have valued at around $185,000 and that's down from about $239,000 last quarter.

Total delinquencies in the portfolio at June 30 were $14.8 million and $11.5 million of that was over 90 days.

Cumulative charge-offs to date are now up to just over $81 million and as a reminder, that entire portfolio is on nonaccrual.

Forward guidance, Raj already updated the guidance about loan and deposit growth.

Last quarter, we gave NIM guidance 3.50% to 3.60% for the year and that hasn't changed.

I do expect that to be probably at the upper end of that range for the year, although, the big unknown there is certainly is deposit pricing.

We are bringing our noninterest expense growth guidance down from high single digits to mid-single digits and that really corresponds to the lower balance sheet growth that we're projecting, which should bring with it a slower rate of expense growth as well.

Couple of numbers that I know you guys will want to see.

The future estimated accretion on covered loans, as of June 30, is $341 million and the future estimated amortization of the indemnification asset is $104 million.

So net of a marginal tax rate of 26.5%, that's a $174 million in earnings were projected to come in between now and the second quarter of 2019.

Again, all that's predicated on the assumption, the most probable scenario, that we will sell all of those remaining loans in the second quarter of 2019.

If, as Raj alluded to, we end up in a situation where we decide, or based on our negotiations with the FDIC, determine that it's in our best interest to keep some portion of that population, and I can't be precise about this at this point, but what that will do is just push some of that income out into the future.

So it'll be less income in the near term and a little bit more income in the long term, but given that our -- the highest probability is still that we'll sell all the loans, I can't really quantify any of that for you at this point.

But directionally, that's what would happen.

So with that, I will turn it back over to Raj to make any closing remarks.

No, I'm good.

We will open it up for Q&A.

(Operator Instructions) Our first question comes from Dave Rochester of Deutsche Bank.

On the loans -- I appreciated the commentary on the pipelines, but was just curious what your assumption was for paydowns in the back half, because as you were saying, those have been elevated and that has a way of cutting into your loan production.

So just want to get your thoughts there.

It's always very difficult to predict that.

In the C&I portfolios, we do tend to see a lot of churn, because of just sort of how the corporate book works.

You kind of see that every quarter from the difference between our production and ending net growth.

But right now, with level of asset sales and refinancings that's going on in the market, so it's a little tough for us to predict going forward what we think about payoffs.

I would say our growth guidance that we just gave you incorporates the best estimate that we can make about that, but it is, to Tom's point, a little difficult to predict.

Yes, well it's been pretty elevated, I guess, from the first half.

Are you just assuming that, that pace sort of continues through year-end or are you expecting a little bit of slowdown on payoffs?

No, there is no expectation of a slowdown, nor -- that's the environment we're in, and we have to assume that until we see signs of a different environment.

Okay.

And on the deposit front, I was just wondering how the national deposit team is doing, at this point.

If you were to do an assessment through the first half of the year here, if they're on-plan at this point.

And I know you changed their incentives to value noninterest-bearing production more, so I was just curious how that's going.

Yes.

So they have brought in DDA.

It's -- they're being measured over the course of the year.

We have more DDA in the pipeline.

I'm certain that'll close before the end of the year, or maybe hopefully, end of this quarter.

This quarter, overall growth was lighter than what their budget was, but if I look at their success over the course of the 2 -- little more than 2 years they've been here, it's been pretty strong.

So we're happy, DDA is still is a tad under 10% of their portfolio, and we're hoping that they will get it up to about 15% range before the end of the year.

That's where (inaudible) for this year.

Okay.

And just one last one on capital, just given the slower balance sheet growth you guys were talking about.

Are you possibly more willing to get more aggressive with the buyback at this point?

Yes.

So we didn't give you an update on the buyback, so let me do that.

So first quarter we bought back about $50 million of stock, second quarter buyback was much lighter given the stock was much stronger.

We didn't really change meaningfully our metrics that we set up for buyback, maybe we should have.

But we are committed to finishing this buyback and then going back to the board and looking at our capital position at that time.

The philosophy stays the same, which is: if there is a line of sight for deploying capital in a reasonable period of time, then hold onto it, if not, give it back.

And give it back in the form of buyback rather than some onetime dividend range like that.

So we will meet with our board again, I think it'll be a discussion for our November board meeting and at that point in time, once we're done with our $150 million, there is always the possibility, if we see less growth and excess capital, that we will do another buyback.

So you're thinking you will probably finish this current buyback by the end of this year?

Depends a little bit on where the market is, but I would think so, that by the end of this year, the stock closes goes to $50, maybe not.

But if it stays what it is, then, yes.

Our next question comes from Jared Shaw of Wells Fargo Securities.

This is actually Timur Braziler filling in for Jared.

Just looking at your deposits strategy and the growth projection for the back end of the year, looks like the growth rate is going to be accelerating a little bit from what we've seen in the first half.

I'm just wondering, where you're projecting that growth is coming from?

Are there any specials currently ongoing that should drive higher balances?

And what is that going to do to the borrowing position?

Yes.

So that is really a, like I said, as recently as Friday of last week.

We looked at our pipelines, right?

And we looked at the campaigns that we're running.

So it's not predicated on at any one big campaign that we have, some 17-month CD special or anything like that.

So it's really a client-by-client analysis on the commercial deposit.

Remember, we have more commercial deposits than we have consumer deposits.

So it's really a client-by-client view of what mandates we have already won, what deposits we're already -- accounts we're already opening and what is the level of deposit buildup we expect over the course of the next 2 or 3 months.

Like Tom was talking about, the loan pipeline -- any pipeline is about what is coming in and what is going out.

And the loan pipeline, what is coming in is generally -- we have a 90% accuracy in measuring what is coming in, because you have term sheets, you have commitments and you know when loans are going to close.

What you don't have a view of, when are loans -- what is going to pay off unexpectedly.

When it comes to deposits, both the inflow and outflow are much more difficult to predict, because even when we know deposit accounts are being opened and money's coming in, sometimes it can take a month, sometimes it can take a year for x amount of dollars to come into that account that you're expecting.

That's why deposit pipelines are much harder to predict but the best prediction that we can give you is we should hit high single digits based on what we see at this point of time.

Okay, that's helpful.

One more on the loss share timing.

I guess, what's driving that decision between second quarter of next year -- which is kind of the main number or the main date that we've been hearing about -- and potentially as early as August or September of this year, is that purely strategic from your standpoint?

Is there ongoing communication approval that has to be taken into consideration with the FDIC?

I guess, what's driving that timing?

And what could result in those sales happening in September versus 2019?

Sure.

So the loss share agreement ends in May of 2019.

The final loan sale is something that we are allowed to do in the last 9 months of the contract.

So that 9-month window starts in August.

So before that, we cannot do the final loan sale.

In fact, we cannot even request to the FDIC of what it is that we want to sell, whether it's the entire portfolio or a part thereof.

All of those discussions officially open up sometime in third week of August.

So we will start our discussions with the FDIC.

Remember the FDIC has the right to ask us not to sell the portfolio, but if they do that, the loss share automatically extends for 2 years and then at the end of 2 years, we again have the right to sell and at that time the FDIC does not have the right to ask her to not sell the portfolio.

So that's how the mechanics of the contract work which is why those dates are important.

The loan sale that we're doing this quarter is not a final loan sale, this is just the one that we generally do over the course of the year, every quarter we sell $70 million or so.

We did that already in the second quarter and we have about $168 million-or-so capacity left on.

But the annual loan sale clause of the contract, that we're going to try and get done this quarter so that the only thing left after this is a final loan sale, whether it happens -- I don't think it will happen in the third quarter, because the timing is just -- there's not enough time.

So whether it happens in the fourth quarter or first quarter or second quarter, it'll depend a little bit upon our discussions with the FDIC and whatever approval process there is internally of the FDIC.

Okay, and assuming that we keep with that May 2019 day, is the expectation still for accretion to ramp higher here in the back end of 2018?

Or should we kind of see it stabilize at the current $85 million level?

If all of the loans are sold in the second quarter of 2019, as all our modeling has always been predicated on, the trend of earnings going up towards the tail end of that will continue to be -- that's -- will continue to be true, yes.

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

So I wanted to first, I think, get a sense -- and I'm not -- I'm sorry if I missed it in your prepared remarks, but in terms of deposit betas, Raj, I mean you talked about sort of the national deposit team and DDA expectations there.

But also, are you seeing tempering of deposit betas for commercial clients you acquired a year or 2 ago?

And just overall, how you're feeling about betas today versus 6 months ago, 12 months ago?

Ebrahim, betas are increasing because more and more customers are getting the news that, that the Fed has moved and they should expect a higher rate.

The older the client has been with us, and the more products that we have sold to the client, especially in the treasury management side, the better the beta is -- the lower the beta is.

There's no question about that.

So by definition, if somebody came in about a month or 2 ago and they have not yet been sold a lot of treasury management products, the beta tends to be higher.

Somebody came in 4 years ago and has 23 accounts with us and has -- is using us for a number of their treasury management needs, the beta is lower.

So I'm generalizing, but that's generally a pretty good trend and you can look at that -- let say there is an account from 3 or 4 years ago who has not bought Treasury management for us, beta will be higher, and that's sort of parked money.

So our intention always is bring them in and sell them treasury management, because if not, you know you will end up having a low-margin customer on your balance sheet 2 years down the road if you don't do that.

So it's time, but it's really -- it's time that's needed to sell treasury management, that's what it comes down to.

Understood.

And I guess, just sort of sticking to that, I mean, obviously we saw one of your smaller competitors are getting acquired this morning and just wondering if you or Tom can comment on how you think about just the pricing environment in Florida, and how when you look at local competitors both on the deposit and lending side?

Yes.

We're happy to see that deal get done.

It's always good to see some M&A action, especially in your backyard.

All I would say is, is the following: it's good to have long-term players as your competitors than short-term players, because long-term players tend to be more rational.

Understood.

And one last, if I can tag along, in terms of FDIC, is it fair to assume that when, come around third quarter, earnings end of October, we should have a lot more clarity around the exact nature of how this all comes to an end in 2Q?

And what the FDIC is thinking?

Or is that premature?

It's hard for me to say, Ebrahim, I can tell you when we will start talking to them, which is third week of August.

What I don't have clarity on is what is their internal sort of process like?

And how quickly will they engage with us and -- I wish we could get it all done, like as soon as possible.

So that 2019 is sort of a clean year and we're not talking to you about loss share and all this funky accounting.

But I -- realistic -- being realistic we're modeling as if this will take all the way to the very last day and hoping that it won't take that much time and that we could get it all done in the fourth quarter.

And does this prevent you from entering merger negotiations, if something like that came around?

Like is it so punitive for a buyer or for a merger partner to sort of not engage with you until then?

Or like how do you think about that?

No, I don't think so.

I think if somebody wants to really talk about it, is willing to invest half a day in understanding just this short-term mechanics over the next couple of quarters, we can explain this in a -- in maybe a couple of hours.

So it's not that complicated.

There's obviously no contractual impediment to doing a deal, but it just -- it's just the noise that it's creates in the numbers, which like I said, if you're willing to spend half a day diving into it on the accounting side, you can figure it out.

Our next question comes from Stephen Scouten of Sandler O'Neill.

Question, follow-up on the FDIC numbers.

Have you guys started to put any thoughts out about what the expense base looks like post the FDIC loss share agreement, any significant reductions in terms of run rate expenses that we can look to kind of 3Q '19 or possibly, as you've talked about, maybe even earlier than that, but have you started to, I guess, crystallize what that expense base ultimately will look like, or could look like?

We haven't yet, Stephen.

I think there's just a lot of things still in play around that.

But as the time gets closer, we'll try to be a little bit more definitive around that.

Okay, fair enough.

And maybe thinking about the loan betas and the deposit betas.

I mean, your core loan yields, I guess, went up a little less than your interest-bearing deposit cost.

So is that a phenomenon we should expect to see continue?

Do you think you'll see more pressure on interest-bearing deposits and higher beta there than you will on your core loan yields, especially as deposit growth on a net basis has to increase -- to meet demand?

I know everyone has been here to talk about loan betas and deposit betas.

There's a very high-level simplification of all that moves inside of a loan book.

But if you were to look at those numbers just over the last quarter, our loan yields went up.

I am talking about our -- not the covered loans, talking about our noncovered loans, from 3.83% to 3.96%, that's about -- what is that -- 30 basis points.

And our securities yields went from 3.04% to 3.33%.

So that's about -- that's a lot more and you would expect that simply because the securities portfolio is predominantly floating-rate and is much lesser duration.

So overall, interest-earning assets, I can't do that math quickly enough in my head, I think they move better than what deposits did.

But I would, again, say that that's a very high-level simplification of looking at margin.

There's a lot that moves on inside the loan book, even the securities book.

But if you were to just use that as a proxy for "core margin", I would say, the margin held in and probably got better by 1 basis point or 2.

Yes.

That's fair, okay.

And last one for me maybe on deposit side.

I mean, have you guys been surprised at all by the pressure on the commercial deposits in the commercial money market?

I know, in years prior when John was still running the call and so forth, he would always talk to his belief that those deposits were stickier and would have lower betas in time.

And obviously that's not been the case.

So I mean, has that been a surprise?

And does that change your thinking about how you look to grow deposits any from here?

Or is this kind of the business model at this point?

So I would say that I have been pleasantly surprised on the consumer side, where the betas have been lower than what we thought they would be.

On the commercial side, there is commercial deposits and then there are commercial deposits.

There is a very clear demarcation between what I would think of as excess money that people park with you and core operating deposits that people have with you.

The deposit betas are very different in those 2 categories and that's what we're seeing.

So over time, just like we're doing on the lending side, we're also working on the deposit side trying to basically grow the business in a true profitable core sense and not grow it through a business that is very price-sensitive and transactional in nature.

So it's not something you can achieve overnight.

It takes time, but that's sort of the chart, both on lending side and on deposit gathering side, there's a big difference between core business and transactional noncore business.

That's what we're seeing on the commercial side.

But combined, yes, the deposit betas are higher for commercial, but it's sort of a barbell, I think, that we're seeing.

What I'm pleasantly surprised is the consumer betas are actually been lower than we thought they would be.

And -- but the story is not over there yet.

We will see what happens.

The Feds have pretty much told us that they will be raising rates for as far as the eye can see.

We'll see what happens.

Our next question comes from Steven Alexopoulos of JPMorgan.

Not to beat the dead horse on the deposit beta side, but I'm really confused trying to figure out this rise in deposit costs, particularly given that balances fell.

Essentially, were you just responding to the competitive environment and needing to pay higher rates to keep your current customers, is that what you saw in the quarter?

It is some of that, but also we've made a decision this quarter to actually push on the CD front and pull back on money market, which -- we had gone aggressive on money market instead of CDs.

You would have seen a lesser increase in deposits -- in deposit cost.

We thought, given where our CD maturities were for last quarter, we wanted to make CDs front and center for that quarter.

Also, where the curve is, if you measure it from a spread perspective, we saw better pricing on a spread basis in 1-year CD but on the rate.

Obviously, rate is higher for a 1-year CD than it is for money market.

We make all these decisions based on spreads rather than rates.

And we thought 12 months is a better place to be.

So that's also impacting where -- the move in deposit pricing.

Okay.

And Raj, you said there were some newer competitors on the deposit front that was unexpected.

Who you're seeing now?

So I was -- this is anecdotal, but I will tell you that we've lost business at rates that makes no sense to people as unusual as TD Bank, for example.

You would not expect TD to be a player and that has happened both in New York and in Florida.

Okay.

And then on the loan side.

So the new guidance is high single digit.

You're about 8% higher in period-end at the midpoint.

Is that about what you're thinking for this year?

I'm sorry, say that again, Steve.

So period-end loans are up at 8% at the midpoint of 2018.

Is that about what you are estimating now for the full year?

Were up 8%?

Period-end loans are up 8% at the midpoint year-over-year?

No...trailing 12 they might be...

Trailing 12 months were about 9%, is that what you're referring to?

I'm looking at total, yes.

Trailing 12 months, we are at about 9%, I think.

And what we are expecting from December 31 to December 31 probably be in the same single high digits.

Okay.

And what are you assuming on the commercial real estate front?

What's embedded in that guidance?

What -- continual run-off in the New York book and slightly positive in CRE Florida, but not a lot of contribution from there.

Our next question comes from Austin Nicholas of Stephens.

Maybe just on the loan growth, just hitting back on that.

I guess, does the guidance imply that growth picks up in the back half?

And then I guess, a broader question, assuming the economy stays in that optimist view and you still see payoffs the way they are now, is the core asset generation ability of the bank still in that, call it, 10% to 15% range?

So, remember our business is a little seasonal.

First quarter is always our slowest quarter and fourth quarter is generally a pretty big quarter for us.

So we are expecting the same kind of seasonality here.

And it's a -- if you look at, we grew $430-odd million this quarter.

We expect numbers that are sort of in that range and slightly better as the third quarter gets into fourth quarter.

That's sort of the pipeline as it looks to us right now.

If you add it all up together, it ends up being high single digit.

But I would not take first 6 months and annualize it, because that includes first quarter and first quarter is generally a flat quarter for us.

Understood.

And then maybe just looking at the equipment finance business and maybe the franchise lending side of things.

Could you maybe give an update on your outlook for those business in terms of growth?

And then any pressure you're seeing on the credit side of things?

So I would say on the equipment side, both on the equipment and the franchise side, our outlook is generally slightly more modest than our typical commercial loan outlook.

The pricing remains extremely competitive in the equipment finance area.

The franchise area, we tend to see better pricing.

But we look at long-term trends in terms of store closings and store openings, and just overall consumer trends in that business segment are a little harder.

So while we think both businesses will continue to grow, our outlook for them would be slightly below that type of guidance number that we just gave on the loan side, just because of how we see the competitive nature of those businesses.

Our next question comes from Lana Chan of BMO Capital Markets.

Just a question around lease financing income this quarter.

You had a pretty nice result there in 2Q.

Curious if there was anything unusual there?

And then if I look at depreciation expense on operating leasing that didn't really move up this quarter in line with increase on the fee side.

So just wondering if there was anything unusual there as well?

Yes actually, Lana, there is.

There is about a $3 million gain in there related to some equipment that came off lease and was sold.

Those things will start to happen from time to time.

But we're not at the point yet where they'll necessarily be in the quarterly run rate.

The leasing business, an important part of the revenue is residual income.

That business was started 3, 4 years ago and it takes time to build the book for that book to then start producing this kind of residual income on the back end.

So we're just beginning to reach that point where some of the leases -- the earliest leases we put on are coming off.

So episodically, you will start to see this kind of income pop up.

But it will still take a little more time for it to become a routine quarter-over-quarter thing because it's still just beginning to happen.

But it's residual income, it is part of the economics of that business, it just takes time to get to it at the back end.

Okay.

And then my follow-up question is around the reserve to loan coverage ratio.

You talked about the qualitative factors being a little bit lower in the second quarter.

Could you remind us, Leslie, about where we should think about that ratio going forward?

I think it will be in the neighborhood of where it is now.

We also had the impact this quarter, which brings that down a little bit, of taking more charge-offs in the taxi portfolio and that tends to -- that affects one half of the equation by more than the other half.

But I don't expect material movements in that ratio, Lana.

Our next question comes from Dave Bishop of FIG Partners.

Raj, turning back to -- I think you mentioned there was some impact in terms of (inaudible) the positive from the underlying economic activity.

There were some business sales that had some deposit outflows.

Any sense what maybe the pay downs on the deposit side were, from sort of that ancillary -- sale of underlying businesses, other business activities than the economy?

It's hard for me to give you a number.

This is more just a vague wrangler look at various accounts when I see deposits go out I'm always checking why they went out.

And more often than not the answer I'm getting back is, somebody is doing a buyback or somebody is buying another company or somebody is doing something which I can't blame our bankers for.

I'm always looking for, tell me did we mess up, did we do something stupid, was our service not good enough, did we not have a product they were looking for, was our rate not competitive, what happened?

And you can't -- often the answer comes back, listen, they used the money for something.

And what can you do?

So that -- I don't have a number that I can give to you, but on my various calls, it is almost a daily occurrence where I'm always checking why somebody -- why some business left?

And then that is by far the #1 reason: that money's being used for stuff.

That's a good sign.

At least our clients are the ones that are doing the acquiring and buying and eventually those opportunities come back to us.

Yes.

Got it.

And then maybe a question for Leslie, securities yields.

You noticed maybe a little bit of repositioning, maybe a remix.

You think that yield holds up and maybe grows from here?

And as -- give you from a balance sheet ratio, I think they ended about 24% of assets, up a little bit.

You think that ratio holds?

You seek to grow that?

Just curious in terms of directional change in balances yield?

I don't think we're doing any massive repositioning of the securities book.

You shouldn't expect the duration to change materially.

I will say, just pulling back from our book and just talking about all the fixed-income assets out there -- my promise that I made at the beginning of the call that spreads have been tightening for loans, especially for fixed-rate loans, for, now, several quarters.

That was true on the bond side as well, bond market has been tightening and tightening and tightening, for, now, a better part of 2 years if not more than 2 years.

It was only in the last quarter, this was the first time after maybe 7 or 8 quarters straight of tightening, that we saw some widening of spreads in the fixed-income market, which I'm hoping is a sign.

I can't call it a trend, because it's only one quarter long, but we have seen some widening of spreads.

Fixed income, the bond market tends to be the smartest money, tends to be -- show that rest of the market where things are headed.

So I am hoping that eventually bleeds into the loan market as well.

But we are -- that was one optimistic sign on the spread side that we saw last quarter.

And we were -- we took advantage of that and we participated and we bought aggressively into that.

We'll see, we'll give you an update again next quarter whether that trend continues and maybe things get even wider.

But that was beginning to happen in March and has continued to date.

It's still not as good as it was, let's say, back in 2016.

Spreads are still nowhere near where the spreads were in '16.

But they have at least bottomed out towards where the bottom was the first quarter of this year.

Got it.

Then just one follow-up question, maybe just to make sure I heard you right.

Covered loan sales this past quarter, second quarter, what you expect next quarter?

I think you said you might look to ramp it up to the $150 million mark?

Yes, we will.

And that's really, David, taking the sales that would normally spread out over several quarters and combining them.

So...

Our next question comes from Brock Vandervliet of UBS.

I was just trying to a square up with the deposit growth guide, which seems to be high single digit.

It would seem to hit that target for the year that the trends we saw in Q2 would have to be a once and done really with higher performance, or performance returning to the norm, I should say, in the second half.

And how do you -- how confident are you that we see that?

Again, looking at the pipeline that we looked at as recently as 2 days ago, it looks -- it is certainly feasible.

Is my confidence level the same as it is in the loan side?

The answer is no, I have less confidence because these are extremely difficult to predict.

Okay.

And as a follow-up, any more color on the qualitative adjustments you made affecting your provisioning methodology?

No, we didn't change anything about our methodology.

As with all banks, we have certain qualitative factors that inform our allowance for loan losses.

And some of those -- the metrics that cause those to move moved in -- some of those came off this quarter.

But we don't usually get into a lot of details on the specifics of what those are.

Our next question comes from David Chiaverini of Wedbush Securities.

I have a follow-up on deposits.

You mentioned that the Moody's upgrade should help attract commercial deposit relationships.

And I was curious, how often do customers cite the credit rating when discussing bringing over deposits?

And what type of tailwind could that provide going forward?

It's not something that impacts the consumer business.

It doesn't even impact the small business.

It is generally on the higher end of commercial is where that can become an issue.

Being invest -- a lot of times larger companies will have investment policies that will mandate that they do business with banks with a certain rating.

Very often, it's investment-grade rating.

And we were just at the cusp of being on the wrong side of investment grade and now we're on the right side.

So that's the business we're referring to.

It's not all-star deposit business.

It's just the very high-end of commercial where this is an issue.

It's an incremental gain.

It's not like a game changer, that suddenly, there is $2 billion to us sitting at the doorstep that now can come in.

That's not -- don't expect that.

But it helps.

A lot of people over the course of last couple years have cited that as a reason that they were not ready to do business with us.

We will be going back to each one of those clients and saying, okay, now we are matured to the level that we are investment grade, how about now starting those relationship or growing those relationships.

It's hard to quantify what then will be, but it is -- nevertheless, it is positive news.

And our deposit gatherers who focus on larger commercial business are quite excited about it.

Now this will be like the institutional, municipal, large corporate kind of space.

Yes.

Not small business or consumer.

Or even middle market.

Yes.

Right.

Thanks for that and then shifting gears to expenses.

So the guidance, going from high single digit to the new mid-single digit range for expense growth and that's in line with the lower loan and deposit growth.

I was curious, just what's driving that lower expense growth?

Is it less incentive comp?

Is it less hiring, just so, what going into that?

Both of those things and more, if you're going to have a little bit slower growth rate, you don't need to hire quite as many people, especially some of the back office people you might otherwise have had to hire.

You don't need to lease new space for them to sit in.

Just generally, but most of that will probably in the comp line because frankly that's the line where most of our expenses are, not for any other reasons.

It just corresponds to a little bit slower growth rate.

And ladies and gentlemen, this does conclude our question-and-answer session.

I would now like to turn the call back over to Raj Singh for any further remarks.

Thank you very much for joining us and taking the time.

I appreciate your interest in the company.

We're excited about where we are, what we've achieved this quarter, and while there are some headwinds, overall we feel very positive about business where it's headed.

And we'll talk to you again in 90 days.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.