BankUnited Inc (BKU) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2018 BankUnited earnings conference call.

(Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Susan Greenfield, Corporate Secretary.

You may begin.

Thank you, Nicole.

Good morning, and thank you for joining us today on our fourth quarter and fiscal year 2018 earnings conference call.

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

Before we start, I'd like to remind everyone that this call 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.

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

Thank you, Susan.

Welcome, everyone, to our fourth quarter earnings call.

We spoke to you 90 days ago when it was a much nicer New York.

I was in New York 2 days ago.

It was in the single digits.

I'm in Miami for the last 2 days.

Let me start by inviting all of you to come to Miami and spend some money and help our economy.

The weather here is 72 degrees is the high and 57 is the low.

And actually, there are a couple of Floridians here who are complaining that it's too cold.

We are very happy to talk to you at the end of 2019 (sic) [2018] with our fourth -- final fourth quarter.

This is a pivotal quarter for BankUnited for a number of reasons.

I'll walk through all of them.

The final loan sale for loss share, as you all know, was executed.

And the loss share for the -- for all practical purposes is behind us.

We also sold substantially all of our taxi portfolio.

When I said substantially all, a few hundred thousand, a couple of the loans are still left with us.

But everything else is gone.

That was also a very big deal, something we've been working on for some time.

And that deal also closed in the last few days of December.

We also announced and completed the second share repurchase program, which we announced at the last earnings call, $150 million.

It was all executed fairly quickly before the end of the quarter.

That takes our share repurchase for the full year 2018 to $300 million.

The first $150 million was executed over the first 3 quarters and the last $150 million in the fourth quarter.

Given the weakness in the stock price, it was a good time to be aggressive and buy back stock.

Also, yesterday, the board met and authorized another $150 million buyback.

It is subject to, of course, Fed nonobjection, which we have -- we're putting in for -- have already put in for.

And we expect to get that in a few days, and we'll commence that a few weeks -- and we will commence that as soon as we have that nonobjection from the Fed.

This Fed nonobjection is something new, which started only 3 or 4 months ago.

All banks are required to get this now.

And also, in November, the operating agreement that we've had with the OCC, which dates back to the time that we became an OCC bank back in 2012, was also

terminated which talks to the maturity of the company as we close in on our 10-year anniversary of forming the company.

As far as the results are concerned, deposits grew by $1.2 billion for the quarter and $1.6 billion for the year.

I think this probably was our biggest quarter.

I'm looking at Leslie here.

This was our biggest growth quarter in the history of the company.

More importantly than the total number was the fact that noninterest DDA grew by $208 million for the quarter.

That takes DDA growth for the year to $550 million, which is about 18% growth in the year.

To draw a comparison to 2017, I think in 2017, we grew only about $110 million in noninterest DDA.

In other words, the growth in 2018 versus 2017 was 5x as high.

We have made demand deposit growth the most important target for us and have been focused on it all year 2018, and we'll continue to focus on this in '19.

We've had good success over there.

$1.2 billion is a great number.

But I will always tell you never to look at any 1 quarter and annualize that.

You should always look at trailing 4 quarters as a better measure of performance.

And we expect that kind of performance to continue and hopefully get better next year.

Covered -- sorry, noncovered loans and leases grew by $257 million for the quarter.

Despite the fact that we, again, had a record production quarter, net growth was lower because of unprecedented levels of payoff and runoff in the portfolio.

For the year, we grew $965 million -- the noncovered loan and lease portfolio.

And these numbers are net of the $80 million or so that we sold in the taxi portfolio.

So if you want to take that out, it will be roughly $80 million higher.

Net income for the quarter came in at $52.4 million.

There was a fair amount of noise in the number, primarily coming from the fact that the final loan sale -- usually, the loss share has contributed to our earnings, always been a positive contributor.

This quarter, because of the way the accounting works, as you end loss share, it actually hurt our earnings to the tune of a few pennies.

So nonloss share earnings would have come at -- come in at $0.59 compared to the $0.50, which is the GAAP number.

The taxi portfolio, the final write-down on that at time of sale was $14 million pretax, which, I think sells through about $0.09 or $0.10.

Those are the 2 big items that created noise in this quarter.

But other -- peel that away, I think we had a pretty decent quarter compared to the fourth quarter of the previous year or even compared to the third quarter of this year.

NIM increased to just a tad over 4%, 4.01%, up from 3.51% linked quarter and 3.52% from comparable quarter in 2017.

Leslie will get more into the NIM and explain to you in a little more detail.

Cost of deposits increased to 152 basis points from 135 basis points in the third quarter and 94 basis points fourth quarter of 2017.

More importantly, we are seeing some stability in our betas.

The betas were relatively flat from third to fourth quarter.

If you dig deeper into different categories of loans.

Commercial betas, maybe just a tad, went down.

And personal or consumer betas went up a tad.

Overall, betas were relatively flat as we compare third quarter to fourth quarter.

We are getting a sense that deposit competition might be rationalizing.

And as the Fed starts to get a little more dovish, we may be reaching an inflection point.

I don't think we're there yet.

I think the move in December will still cause deposit cost to move up at least for the first quarter, probably even a little further.

But there seems to be early signs that deposit competition might be getting a little more rational.

Asset quality remains strong.

Obviously, NPAs dropped for us from 61 basis points to 43 basis points just from the sale of the taxi portfolio.

Net charge-offs for the year came in at 28 basis points, but 18 of the 28 basis points was actually due to taxi, which is now behind us.

Let me talk a little bit about 2019 and what we see in the future for the next 12 months.

I'll start by just talking about the economy and capital markets.

There seems to be 2 different indicators we're getting.

When we look at the economy metrics, both in New York and Florida and even Nashville metrics, and we look at our own customers' balance sheets and their cash flows, we feel that the economy is doing very well.

We don't see any cracks in any part of our business and -- or any of the economies that -- regions that we play in.

When we look at capital markets, we see some red signals pointing to a tougher economy as we go through 2019.

Now those 2 things are diametrically opposites.

And what we -- our stance has -- is that we have to be cautious or careful.

But at the same time, we remain optimistic and the business continues with its momentum.

We had a call last night to look at the pipelines of the various businesses for the -- at least for the first quarter, pipelines are healthy.

And from a credit perspective, we talked about that as recently as last week, and we still don't see any signs of any cracks anywhere.

So optimistic but cautious is the tone that I would say that we have on the economy.

And that forms our view for how we want to grow this year.

I think growth, our best guess, for balance sheet both for loans to deposits is going to be in the mid to high single digits.

And expense growth will be in the low single digits.

I'm sure the -- we talked last week -- last quarter about a new initiative that we had taken on, almost a journey, I would say, where we hired Mackenzie and another firm to help us think through areas of improvement.

That project is a third of its way there in terms of, at a high level, figuring out where the opportunities might be and the opportunities of both expense and revenue opportunities.

We have just entered into the second phase of that project, which we're calling the design phase where we actually take each of those opportunities and build detailed plans around how and when we can achieve those and validate them.

And then the third phase is the implementation, which is the longest phase, will start in April.

In a -- the way we have timed this is the second stage with -- the design phase will be done a week or so before the earnings call in April.

And at the earnings call, we will give you detailed guidance around what are our targets, how are we going to get there, what are the initiatives that we're talking about, what are the time lines to achieving them and how we will track and hand over to you guys.

So I will leave you with that.

The work is progressing well.

There's a lot of enthusiasm for it.

It really can be summarized as a journey towards operational excellence.

And like I said, it is both revenue and expense benefits and -- but what I will say is it's not a major change in strategy.

It's not about launching new products and new businesses in the new geographies.

We obviously look at new opportunities as it is, but this is more about looking inwards at what we do and how can we do it better and where are we falling behind in terms of operational excellence and going after those areas.

So there's a fair amount of automation that will come out of it, a fair amount of changes on processes, some organizational design changes, looking at our branch network and the like.

While we're doing this, I -- there's -- this is an important topic that -- this topic, we haven't talked about enough in the past, but I will start mentioning this and giving you updates at this earnings call is that we continue to make investments in technology.

Without which, the business is moving so rapidly.

The technology is moving so rapidly that if you do not stay up with this, you will be irrelevant in 2 or 3 years.

So when we launch this project or this journey or program, whatever you want to call it, I ask that we not try and hit these numbers by delaying these important technology investments and improvements to our platform like the digital platform or the cloud migration that we're doing or the new commercial payments platform that we are in the middle of implementing, that all of that has to happen as originally planned, but we had to go find other areas where we could do better.

So it is not about kicking the can down the road, it is actually finding true areas where we can improve while continuing our pace of investments that are needed in the business.

There are a couple of smaller things as we had mentioned to you over the years that there is a good chance that once loss share is over, we could look at our mortgage servicing operation and take a hard look at that, whether it's warranted that we'd be a mortgage servicer in the post-loss share environment.

We made a decision in November that we will exit the mortgage servicing space, and we started taking steps to that effect.

We expect to not be a mortgage servicing business by April of this year, and there will be cost saves associated with doing that to the tune of about $7.5 million, $8 million, $8.5 million.

These are direct expenses.

These are not things such as space and other [bill] of assets that's freed up but these are direct expenses that we will be able to take out.

This is an annual number.

This is not a 2019 number.

You can imagine that '19, it'll probably be about half or maybe a little bit less than half this.

The technology that supports a mortgage servicing operation, those contracts run through November, I believe.

So by December, we will have fully reached this $7.5 million to $8 million, $8.5 million number; and 2020, we will have it for the full year.

With that, I will turn it over to Tom, who will talk about just in a little bit more detail how fourth quarter went and the year went.

And then Leslie will talk to you more about the P&L and also a little more detail in that.

Great.

Thanks, Raj.

So a little bit more detail on both the loan and deposit growth side.

So for the quarter, first starting with the loans and leases.

As Raj mentioned, total noncovered loans actually grew by $336 million for the quarter when you set aside the $79 million sale of the taxi portfolio.

We looked kind of within the business units.

Residential loans grew by $185 million for the quarter, which included $103 million growth in the Ginnie Mae buyout loans segment.

C&I business -- now talking about C&I and then core commercial, which is kind of what we call our corporate banking and business banking teams, but the C&I book in total grew by $110 million for the quarter.

That was net of $105 million in seasonal declines and mortgage warehouse outstandings and the reduction of $79 million in taxi medallion portfolio due to the sale.

So in our core commercial businesses, the corporate banking business offset that by growing by $243 million for the quarter and $75 million in the business banking team.

So $318 million of total growth within the core commercial area and very strong results in both the New York and Florida corporate and business banking markets.

As we switch to CRE, the CRE portfolio had an aggregate decline by $74 million for the quarter, with $178 million decrease in the multifamily asset class.

And as you've seen in previous quarters, this was primarily focused in the New York market on long-term refinancings, with $146 million decline in the New York multifamily market and also an $18 million decline in construction and land loans, which was offset by growth in other segments, predominantly office and industrial.

Loans and leases in the commercial lending subsidiaries grew by $37 million.

In aggregate, $57 million of that was in Bridge, which is Bridge Funding Group, our leasing and franchise company, which has continued to have a good year all year long, both in operating leases and in franchise financing.

That was offset by a decline of $20 million in Pinnacle, our municipal leasing and finance subsidiary, which has kind of continued to be a bit under challenge due to the changes in tax rate structures and the competitive market that we see in that.

That's been sort of a continuation of their trend line through most of the year.

As Raj mentioned earlier, commercial production, exclusive of mortgage warehousing and residential, was very strong for the quarter at $1.4 billion.

It continues to be blended across a nice mix.

But in this particular quarter, over 70% of the new production was in floating rate.

So our desire to continue to develop a very balanced book, very well mixed across the portfolio segments continues to be successful.

On the deposit side, as Raj mentioned, Q4 was a record quarter for deposit growth.

And the trend in noninterest DDA continued.

Noninterest DDA accounted for $208 million of deposit growth for the quarter.

While savings and money market grew by $674 million and time deposits by $104 million, while interest-bearing demand deposits were relatively flat.

What's really nice to see is we had a really great deposit growth across all parts of the franchise and the national team, the Florida team, New York, Florida corporate banking, the $1.2 billion, as Raj mentioned earlier, was really broadly spread out across the entire company, which was really excellent to see.

So that sums up the deposits for the quarter as well, and I'll turn it over to Leslie.

Okay.

Good morning.

To give you a little bit more details on the numbers and a little bit more detail about some of the forward guidance.

First, a little bit more detail on the covered loans sale.

We sold loans with an unpaid principal balance of $260 million plus a little over $5 million worth of real estate owned.

The loans were sold at an average price of about $97 million.

One pool of $150 million actually sold at $102 million, which speaks very positively about the loans that we retained on balance sheet and their quality because they're even higher quality than the ones that we sold.

The aggregate impact on the P&L for Q4 of all of this activity related to the covered loans was a negative $9 million.

That included -- that's pretax -- included about $121 million of accretion, $129 million of indemnification asset amortization and then about $1.6 million of just kind of true-up that was recorded in conjunction with the sale.

Particularly, we had some gain share that we had to do on that pool that sold for $102 million.

So that turned that into a negative number in addition to the fact that there was some expenses associated with the SBA with the sale that are not eligible for FDIC indemnification.

The numbers are a little bit different than what the estimates that we had previously disclosed.

And what's really driving that difference of a few million dollars is the higher sale price.

And while that's a little bit counterintuitive in the short run, that higher sale price had a negative impact because it resulted in an even bigger amortization of the indemnification asset than we expected.

The ones retained have a UPB of about $401 million, a little less than we originally projected due to some payoffs that occurred in the intervening period and a carrying value of $201 million.

The remaining estimated interest income to be recognized on the retained loans is -- our best estimate today is $287 million based on our most recent cash flow forecast.

That's a yield of 32.9% right now on that portfolio.

And for 2019, we'll probably see about $60 million of that $287 million coming in.

The loans have a weighted average life of 4.3 years, but the tail is obviously much, much longer than that because these were 30-year mortgages that originated between 2001 and 2008.

So the tail is much longer.

That estimate also differs a little bit from what we had previously put out, and that difference is really driven by changes in estimated prepayment speeds.

A little bit of color on the net interest margin.

Net interest income for the quarter was $295.1 million, a $56.2 million increase over the comparable quarter in the prior year.

The NIM increased to $401 million from $352 million.

And that increase was really driven by the increase in the yield on covered loans for the quarter, the acceleration of the timing of the final loan sale and the higher-than-previously-modeled selling price resulted in an acceleration of accretion on those covered loans.

The yields on both noncovered loans and securities increased.

The yield on noncovered loans increased to $418 million for the quarter from $405 million linked quarter and from $380 million for the comparable quarter of the prior year.

The tax-equivalent yield on investment securities was $359 million for the quarter, up from $341 million for the immediately preceding quarter and from $289 million for the fourth quarter of 2017.

These increases are driven by coupon rate increases on floaters as well as some change in portfolio composition.

Duration of the portfolio actually declined slightly this quarter to 1.42%.

The -- in comparison to the prior year, the yields on investment securities, noncovered loans and the NIM were each impacted by about 9 basis points by the change in the tax rate from 35% to 21%.

Raj has already spoken to deposit costs for the quarter.

The increase in the cost of FHLB advances was driven by 2 things.

One, just general market rate increases; and two, over the course of the last couple of quarters, we've done some hedging and extended out the duration of those advances a little bit.

A little bit of color around reserves and the provision.

The total provision was $12.6 million for the quarter.

That included $14 million related to the taxi medallion portfolio.

The mark to adjust the carrying value of those loans to the sale price runs under GAAP through the provision for loan losses.

So the mark is what you're seeing there even though part of that mark is rate related rather than purely credit related, but it all runs through the provision.

So the price per underlying medallion averaged out to be about $155 million.

One of the things we discovered when we did the sale, in part because of the rate mark I just mentioned, is that loans are worth less than medallions.

But that was the average price per underlying medallion.

Excluding taxi, the provision for the quarter was actually a net credit of $1.4 million, mainly because of declines in historical net charge-off rates and lower provisioning for classified loans.

We had some other classified loans resolved during the quarter.

The ratio of the ALLL, the total loans, declined from the prior quarter end, largely due to the elimination of the reserves related to the taxi loans that came off when we sold the loans.

We also did have some declines in loss factors and a reduction otherwise in criticized and classified loans for the quarter.

However, I want to point out that the nonperforming asset coverage ratio or the ratio of the ALLL to nonperforming loans actually increased from about 60% at September 30 to about 85% at December 31.

It didn't change anything about our ALLL methodology.

A little bit more illumination on the forward guidance.

Raj mentioned that we are currently expecting mid- to high single-digit loan and deposit growth for 2019 and low single-digit expense growth.

I want to put -- be clear that none of this guidance includes any impact attributable to the journey that we're -- the transformation journey that we're undertaking with consultants that we're going to give you more clarity on in April.

So all of this guidance will be updated at that time because nothing is baked in.

The expense guidance does include the expected consulting fees related to that engagement.

So that is already baked in, but any cost savings that will come out of it are not in any way baked into that guidance.

But the total of the cost save is stronger than mortgage servicing, right?

Yes, it does.

It includes what we believe we'll realize in 2019 from the termination of mortgage servicing operation.

It includes the reduction in the deposit insurance expense.

It includes the additional expense that's going to flow through the P&L in 2019 from some of the technology investments that Raj alluded to.

All of that is baked in, but no cost saves from the -- those -- the projects that we're undertaking are included in that low single-digit increased guidance.

Currently, we expect the NIM for the full year.

And you'll be so happy to know that this is -- the core NIM -- it's the only NIM that's left.

We expect to be between $250 million and $260 million for the year for 2019.

Now that's predicated on an assumption of no Fed action in 2019, no hike -- no reductions by the Fed in 2019.

A very flat curve.

And well, we believe that these are relatively conservative assumptions to that deposit behavior.

So that's the underlying that gets us to that NIM.

Effective tax rate, I would say, 23.5% to 24% for the year.

And around the provision, provision sufficient to maintain the allowance ratio at current levels are slightly higher, so 50 to 55 basis points.

And we have no reason to believe there'll be an increase in net charge-offs from the -- that we saw this year, excluding taxi.

And at this point, I'll turn it over to Raj for any closing remarks before we go to questions.

Thank you, Leslie.

I will close by saying we're very happy with how far we've come.

It's been 9.5 years since we started the company.

2018 was an important year for us, but not nearly as important as 2019 will be.

We are now in the post loss share era as we stand here, 3 weeks into it.

We closed out the quarter strong.

Deposits, like we said, was a record growth.

DDA was strong.

And that momentum continues into this quarter.

So we're excited.

We keep our fingers crossed with economy and rates.

Things we don't control, but obviously we monitor very closely.

And with that, I will open it up for Q&A.

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

I guess maybe starting off -- and I don't know if we should call the former covered loan income or how you want to phrase that, but let me say covered loans just for simplicity.

I heard you, Leslie, on the $60 million in 2019, but I just want to make sure I understood the path of that going forward.

I mean, it sounds like -- just given the total amount of accretion, it sounds like the $60 million probably goes into 2020 at maybe, I'm going to say, $50 million and then $40 million.

And I mean, maybe it's -- is that a right -- is that sort of the right way to think about it?

But also, on there, if any of these covered loan's prepay, are we -- could we see that $60 million jump in any given quarter or for the year to, I don't know, $70 million or $80 million given accelerated prepayments?

The short answer is yes to both your questions.

I don't have the exact numbers for the future years in front of me.

But the trend, the way you're thinking about it is the right way to think about it.

And yes, there will be a pocket income if any of these loans prepay early on.

But that $60 million includes the coupon.

It includes our...

The coupon.

Yes, includes the coupon.

It includes that, but he's right, if loan's prepaid, there is some acceleration.

Now that includes our estimated -- our estimated CPR is already baked in there.

So it would have to be prepayments in excess of what we're estimating before the number would be higher.

Yes.

Got you.

Understood.

Okay, that helps.

And then in terms of the $150 million buyback that you just got approved for going forward, how quickly do you think you may want to execute on that $150 million?

Could that actually be in first quarter?

We will start, like I said, within 2 or 3 weeks of that approval.

I will point to you the last 2 $150 million share repurchases, the first one when the stock was in the high 30s, it took us 9 months to do.

The second one when the stock was closer to 30, it took us 3 months to do or 2.5 months to do.

So it'll depend on the stock price.

We don't try and call exactly what the stock price should be.

We think of -- more of this as just -- dollar cost average is the best way to keep buying back stock.

But we tend to do it faster if the stock is weaker and a little slower if the stock is stronger.

So it all depends where the market is.

If, in March, Brexit is happening and the world is falling apart, we might be doing it faster.

And if not, we might be doing it a little slower.

But it'll start, like I said, in maybe 2 or 3 weeks.

Got it.

Okay.

And then -- because part of the reason I asked is just your CET1 ratio is obviously much higher than many of your peers.

And Raj, do you -- when you think about like where you want to be from a capital perspective, I mean, it seems that you have a lot of flexibility not just this $150 million currently, but, going forward, to execute several of these, let's call, $150 million programs over the next year or 2 years, how aggressive would you want to be, generally speaking, with bringing down your CET1?

Or where would you like to end up at some point?

I don't want to talk about programs that have not been authorized.

Having said that, I will tell you that once this $150 million is done, we will go back to our board and sit down with them just like we did yesterday and talk about the next $150 million because we do fully recognize that we have excess capital.

Our next question comes from the line of Ebrahim Poonawala of Bank of America Merrill Lynch.

Just first question, Leslie, in terms of your margin guidance, $250 million to $260 million, could you give us a sense of where that comparable number was in the fourth quarter?

And if we do end up getting a rate hike, like do you see the margin at this point relatively neutral?

Or would you consider yourselves a little liability-sensitive there, there's maybe upside to the margin as the year progresses without any Fed rate hikes?

Any color there would be helpful.

Okay.

So I would say the comparable number for this quarter is probably right around $248 million to $250 million, so that gives you a sense of where that is.

In terms of -- I think the thing that would make the most difference, Ebrahim, is that the curve or the speed more than if the Fed does or doesn't hike once or twice.

I think Raj expressed some level of optimism that if the Fed takes a pause, maybe some of the pressure will come off deposits pricing, but that remains to be seen.

We really have to wait and see if that does or does not materialize.

And we do expect that even given the December rate hike and some of the repricing that is likely to still happen in the back, both the -- regardless, our deposit costs will continue to go up for the next quarter or 2. So we're -- and in terms of the deposit or behavior and the level of success that we can have with managing that rate of increase, that's going to remain -- that remains to be seen.

Got it.

And just on the expense, low single-digit expense guidance, could you tell us -- just to make sure I'm looking at the right numbers, what your basis when you look at the low expense growth?

Is it for full year 2018?

Yes, the $478 million, $480 million?

For full year 2018, excluding the amortization of the indemnification asset.

Okay.

So the -- relative to that you expect low single-digit expense growth.

And it doesn't include any efficiencies coming out of this plan with Mackenzie that you'll update us in April?

That's correct.

Understood.

And Raj, just one last tied to that, give or take, your earning in ROE of -- ROTCE of about 9% right now, when you think about the rate outlook you've laid out means, obviously, you've gone through the consultant, spent some time.

Like what's the reasonable level of ROTCE that shareholders or we should expect over the next year or 2020 without any big change up or down in the economy?

Ebrahim, I'll answer your question in April when I lay out in detail what those measures will be and what the numbers will be and add them to our ROE guidance.

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

Just on the expense on the employee comp this quarter, did that reflect, I guess, some headcount reduction in anticipation of stepping away from the mortgage servicing business, I'm guessing?

Or is that a good base to grow from with the normal first quarter growth?

Really, Jared, what you see in the comp number for this quarter is truing up our bonus and incentive accruals for 2018.

I would expect that to go up in the first quarter for 2 reasons because their goal was to expense in the first quarter in comp because of payroll taxes and HSA feeding, 401(k) contributions, et cetera, that are elevated in the first quarter.

And we're not going to see most of that headcount reduction until sometime into the second quarter.

Okay.

Okay.

And then in terms of the initiatives that Mackenzie is looking at, is there -- are they -- there are things around loss share that could be potential cost savings beyond just the mortgage servicing side of the business?

No.

I think the mortgage servicing, we've been working on that for a while, and Mackenzie is not looking at that.

That -- those plans are already done and they are in motion and will be realized, like I said, sometime in early second quarter.

Okay.

And then just finally from me.

For the loans that were retained at December 31, was the loss share officially closed?

Or is that still until the...

Yes.

Officially, it's not closed yet.

We're still working on the paperwork.

But for all practical purposes, you should assume that it's done.

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

So when you take a step back, Raj, I mean, we're looking at a core NIM in the $250 million, $260 million range, and now I'd say that still benefited a little bit just by the remaining mortgages that you retained that are yielding 30 something percent.

I mean, that's -- a $250 million to $260 million NIM is low relative to the industry.

How -- over -- I mean, not just in 2019, but over future years, how do you get that net interest margin up closer towards peer levels?

Yes.

There are 2 ways to do it, Brady.

You can either improve their interest income or you can reduce their interest expense.

Interest income is improved by changing the business mix and taking more risk, which I don't think is very wise this late in the cycle to go out under a spectrum.

On the deposit side, that's something we're working on and it's not something that can be achieved in a quarter or 2 or even a year.

Last year, we've generated $550 million of DDA.

If you can have similar types of growth, maybe even better this year, it's -- that starts to help.

And ultimately, the thing that is beyond us, which is sort of just the shape of the curve, which will also determine where your margin falls in, which is something you can only pray for and not really work on.

So those are the 3 things that impact margin.

I'm not interested in taking more risk and materially changing the portfolio and some of these start to get into higher yielding and higher risk, name it, construction loans, subprime loans or whatever it might be.

I think the time for that was probably 5 years ago, but not today.

But we are going to double up our efforts on deposit side and keep working on that.

That -- that's what will change.

It'll not change to suddenly, a 3% number tomorrow.

But it will be a slow progression, and we'll get there.

All right.

And then as you all put in the press release, the operating agreement with the OCC was terminated, which I think you've been under that since you took over banking.

That's over a decade.

And if I remember right, that agreement held you all to maybe around a 9% Tier 1 leverage ratio.

With that operating agreement now gone, what flexibility does that give you?

Obviously, you can maybe be a little more aggressive on the buyback and take capital a little thinner than you could otherwise.

What are the -- what's the impact of not being under that agreement anymore?

From a capital perspective, yes, it did have some constraints on capital, but we were still so far above those limits that that's not what was defining how much we can buy back.

So after this $150 million that we've announced, if that operating agreement was in place today, I don't think that would have changed that $150 million.

It would be just the same.

Yes.

What it really does is give us more flexibility at the bank and how we would structure the capital structure at the bank level because those constraints were at the bank, not at the holding company level.

So the sub debt that we issued a couple of years ago, I think 2 or 3 years ago, we did that.

The holding company, which we pushed down, there's capital into the bank.

If the operating agreement was not in place at that time, we may have chosen to do it differently and maybe it could have saved us a couple of bucks here or there.

So it gives us back our flexibility, not on overall capital levels, because we're not in that much disagreement with where our capital levels need to be at the bank anyway.

Also, it takes away a lot of sort of quarterly reporting and -- in the business plan we put out every year for the next 3 years and then we have to manage that business plan, and that sort of administrative burden is lifted, which is helpful.

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

So you guys have seen really impressive noninterest-bearing deposit growth year-to-date, which you noted, but that's also been a tension point for a lot of your peers and I think the industry as a whole.

So can you talk a little bit about what you guys might be doing differently?

Or what you're capitalizing on that's made that such a nice outperformance for the year?

And do you see that continuing?

It is a very impressive number, but the answer is going to be very boring and there is nothing that special.

At the beginning of last year, every year, actually, at the beginning of the year, we set out goals for the year for the company, create a rallying cry all over the bank about what is important.

And we started in January last year and said priority number one, two and three is demand deposit growth.

And then we followed it up with action by changing incentive plans to incent that growth in DDA as the #1 criteria of -- to get paid.

So when you change the subject, you change messaging and you repeat it over and over again for a whole year, you see results.

So there is no magic to it.

It really was just those 2 things.

Okay.

Good.

Good.

And maybe on the loan growth side, and I'm not sure I missed a little bit of Tom's comments, so I apologize.

But on the growth expectations, I'm curious about what's embedded there within New York City multifamily.

Is that still expected to run down from here?

Or are we reaching a saturation point where that can kind of stabilize and/or maybe even grow?

We are not solving for any particular number.

We'll be happy to grow it from here.

What we are solving for is a spread in structure that is acceptable to us and fits in what we have defined as the risk box that we want to play in.

So we ask -- we get asked this question very often that there's some magical number or threshold.

And once we've reached that, then we can start growing.

It's actually not the case at all.

We could have been growing anytime over the last year or could grow today if we find the right kind of spreads in structure.

Now the spreads did widen in the fourth quarter, and we were getting very excited about it.

But in December, we saw those spreads go back.

And more importantly than spreads, has been structure.

Longer-dated IOs are becoming more and more common, and those are hard to do.

Yes.

And you still say, I would add a lot of equity recapture available in the market, as Raj mentioned, a lot of duration.

So we are making new multifamily loans.

We've been making new multifamily loans.

They are recorded for the last 4 or 5 quarters.

It's just the overall environment today, when you look at still what's available in the CMBS market and the lifeco market, just doesn't offer us, for the most part, an attractive thought process around why these are great assets for us right now.

I would like to make another point here that our portfolio is -- it's not completely floating or completely fixed.

I'm talking about the total portfolio of the bank.

So as rates start going up and as our fixed rate portfolio continues to reset or get refied and we put in new product, without balance sheet growth, there is a lift in earnings that happens from that.

So we will benefit from that, which, if you were a completely floating rate balance sheet, it would not -- that benefit would have been captured already.

So other banks that are more fixed than us, they will benefit even more obviously.

But I'm kind of stating the obvious, but I just don't want people to forget that as these -- talking about multifamily loans.

As these multifamily loans come up on their 5-year anniversary, they go from being in the low 3 coupons to low 4 coupons.

And that's not growth, but that's growth in earnings.

Yes.

No, that's helpful.

And then maybe one last question.

You mentioned, Raj, obviously, record production this quarter.

Can you give a little color in regards to production in the quarter relative to previous quarters as well as pay down numbers?

And then if you think there was any impact there of loans coming into the bank with capital markets kind of being shut down in the fourth quarter, if that was impactful at all.

Yes.

It is -- we generally don't get into production because it gets very complicated quickly between commitments and outstandings and changes in commitment levels.

At a high level, I will tell you the production environment was very strong in the fourth quarter.

And the only place where we felt weakness was municipal finance.

That has been -- 2018 has been a painful year for that business line, mostly because the spread in that business has really, really come down and is not meeting our hurdles and we're losing a lot of business.

So that business had a weak quarter and a weak year.

But other than that, mortgage warehouse has been a good growth business for us.

Commitments have been growing very nicely, but utilization levels in 2018 were meaningfully lower than '17 and '16.

And that's probably also because of the environment mortgage production overall and the system has been much slower, which makes for the lower utilization for warehouse lines.

And -- on the other thing that you talk -- we talked in the past is we -- compared to 2015 and '16, our CRE or multifamily business in New York has not been at the same level of production that historically it has been.

So you take those 3 things out, everything else is hitting in all cylinders and production is very strong.

Unfortunately, so is runoff.

And that's why the net number ends up being just pennies on the dollar compared to the gross number.

Even before you asked me the question, do I see that trend changing and what will it take to change that trend?

I don't know what it will take to change the trend.

But that trend has been very much with us for a good part of the year, if not longer, and continues into the first quarter.

Our next question comes from the line of Steven Alexopoulos of JPMorgan Chase.

To start on the NIM, so for starting points, $248 million to $250 million and full year is $250 million to $260 million implies a lift in NIM, right, through the year.

And the $60 million benefit from the accretion will help.

What's the underlying assumption for deposit cost within the guidance?

I think, and Steven, this is -- I'm talking from memory here, but I think it's about a 50 basis point increase in interest-bearing deposit cost.

Okay.

So moderation from what we saw in 2018.

Okay.

And then -- okay.

And then, Leslie, on the loan yield...

Yes, moderation of increase in deposit cost.

But part of that moderation is the fact that we expect the Fed to keep moving the way they have moved in 2018.

Right.

Yes, as I said, we're assuming no hikes, no reductions if the Fed will just -- that's what baked into that forecast.

And we'll update it if need be.

Yes.

Okay.

And then on loan -- the loan yield -- so obviously, quite a few moving parts to the loan yield story in the quarter, you'll now have the benefit of the retained loans.

Leslie, what should we be thinking of as a good starting point for loan yields in 1Q, which should be a pretty clean number?

Yes.

Steven, unfortunately, I don't have that in front of me.

I mean, my best expectation is it'll go up from 4Q.

But I don't actually have the details of what we're projecting in front of me at that granular level.

Okay.

Then finally, Raj, you said the deposit environment is becoming more rational.

I don't know if you heard Signature's call.

But Joe said, this is the worst deposit environment he's seen in his career.

Competitors are offering 3%.

What are you seeing that's leading you to believe that it's becoming more rational?

I'll -- my Treasurer who is at the frontline of fighting the battle on deposits, when he calls me and says to me, this was probably 6 or 8 weeks ago, that Raj, this month, the calls that I got for exception pricing were for the first time less than what I got the previous month.

That's an inflection point that I'm referring to.

And that has happened now 2 months in a row.

That growth won't change tomorrow.

But I'm referring more to -- in my Treasurer's mood at the end of the year versus for the last 3 years that he's been in crisis mode and he looks a little bit happier and he's smiling a little more than he used to.

So in other words, from purely anecdotal evidence.

Yes.

And our next question comes from the line of Lana Chan of BMO Capital Markets.

Did you guys mention how much mortgage servicing income you're getting and expected to decline in 2019 with the exit?

Frankly, Lana, it's been completely insignificant.

From quarter-to-quarter, it runs at about breakeven on the revenue side.

Not net -- not revenue net of cost, but it's just that -- it's small, Lana.

And we just haven't had that much of it.

Some quarters, the fair value market's positive.

Some quarters, it's negative.

But over time, it just doesn't really contribute to anything meaningful on the revenue side.

It's never that material, that's why we don't disclose it.

And just curious with the sort of Mackenzie review.

Have you thought about the -- or looked into the cost of -- or benefit of potentially deleveraging your balance sheet with your securities and borrowings and using some of the freed up capital to buy back stock?

Would that theoretically make more sense from -- given where the valuation is trading today?

Lana, it's not really part of the Mackenzie project.

But those are numbers that we run all the time.

So we're constantly running those numbers and making decisions about buybacks accordingly.

And we'll do -- I mean, to this point, to continue to do the repurchase program without having to do that, but we will continue to include that in the analysis going forward.

Our next question comes from the line of Dave Bishop of FIG Partners.

Raj, just in terms of the business environment, you said pretty strong across-the-board, you've been hearing good things coming out of Florida region.

Just curious how you could know what you're seeing just in terms of the health -- general health of the Florida economy versus maybe some of the other parts of the country you operate in.

So we obviously have a deeper view into Florida and also New York not just because of economic data we collect, but, more importantly, from the balance sheet and P&Ls of our clients that we review on an ongoing basis, right?

At least once annually, we look at every loan and see how our clients are faring.

And that's what I'm referring to.

So actually, as annual reviews come in, we look at that and we look at the cash flow, we look at coverage ratios, and we see things are stable to better.

And yes, that is a little bit of a backward-looking view.

Because by definition, we're looking at what happened to them yesterday, not what will happen to them tomorrow.

But it's an important view.

And it's a very detailed view.

When we look at capital markets, you could argue that's a forward-looking view.

And that's how we think about it.

And we try and marry those 2 things to form an opinion about where the economy is headed, which is why I said at the beginning of my remarks that we're optimistic but cautious.

I might add, when you move around the state of Florida and you basically look at all the major markets that we're doing, that we do business in and all the major industry segments, most things are doing pretty well.

I mean, each market's a little bit different from Miami to Orlando to Tampa to Jacksonville, Fort Lauderdale in terms of what are the main drivers of each of those economies.

But as you go from city to city and we do quiet meetings and whatnot and meet with economists in the area and capital markets people, the view across each of these major markets is optimistic for 2019.

Got it.

And then from a modeling standpoint, you mentioned the impact from the exit of the servicing group there.

Any sort of impact from the revenue side we should think about as we head into 2019 as well?

No, not beyond what we -- the information we've given you around the yield on those retained loans.

As I've said to Lana, on the revenue side from the servicing operation, it's never been significant.

Our next question comes from the line of Dave Rochester of Deutsche Bank.

On the deposit growth, what are the chances you could actually continue to see more elevated growth from here?

It just seems like you're having a lot of success right now.

You're talking about deposit competition rationalizing.

Is that mid- to high single-digit growth maybe a little bit conservative at least as deposits go?

Listen, from your lips to God's ears, that's what we'll say.

It is the hardest thing to predict.

Deposit growth is very hard to predict.

Unlike loans, which are far easier, there's -- there can be surprises in loans, too.

But on the deposit side, the surprise is every day.

And that's why I said don't take the $1.2 billion for this quarter and annualize that and say we're somehow going to do $5 billion.

That's not going to happen.

I think getting a longer-term view is better and a better predictor of our performance than any 1 quarter.

I can give you a color for the first few days of this quarter.

Nothing that I've said contradicts what we're seeing in the first few days of this quarter.

It's coming along fine, but deposit numbers can move around a lot on a week-to-week basis.

Yes.

Appreciate that.

And how is the large deposit team progressing, the national team at this point?

Are you guys happy with the results so far?

How large is the book?

Just curious on that front.

We have not disclosed how large the book is, but I had said when we had brought the team on that success will not be measured by hundreds of millions but by billions.

And I will tell you that they have been successful.

Great.

And then I guess as all-in costs go, where are you seeing new deposits coming in today post the hike?

And where are you seeing pricing in the market just on money markets and CDs?

Yes.

If you want to grow money market, you have to have a 2 handle on the consumer side.

Business is difficult to say because it all depends on the full relationship that you have.

But on the consumer advertised price, the number starts with a 2. On -- and if you are at the $175 million range, you're basically treading water, not growing, not shrinking.

And if you're below that, you'll shrink.

In terms of 1 year CD or 13, 14-month CD, if you're at the $250 million range, you are flat.

And if you want to grow, you have to be in the $260 million to $270 million range.

Got you.

Great.

And then I know you plot a lot of the deposit growth into securities this quarter.

But you also paid down some borrowings as well, which helps reduce that interest costs you were talking about earlier.

Is there any opportunity to pay down more borrowings?

Do you have any more lumpy borrowings rolling off at higher rates?

Is that going to be a focus this year at all?

It's something -- potentially, yes.

It's -- we did -- we had a lot of cash this quarter.

A few things.

We sold the covered -- we had a lot of deposit growth.

We sold the covered loans.

We got the $300 million check from the Internal Revenue Service.

So we had a lot of cash this quarter.

So some of that we deployed into the securities portfolio.

And some of them, we used to pay down some borrowings.

And we'll continue to weigh those 2 opportunities and decide which makes the most sense.

But -- and yes, there are more borrowings that could pay down if that gives us more juice than buying bonds, we will.

Yes.

And I -- sorry, if I missed this, but what was the overall -- the average purchase rate on those securities you bought in 4Q?

And then where are you seeing reinvestment rates today?

I don't have the numbers in front of me for the average yield on what we bought for the quarter.

I just don't have that right here, but you did see the yield on the book go up appreciably during the quarter.

And a lot of that was attributable to what we put on.

December was a good month to buy, as you probably already know.

Yes.

Spreads are wider in December, which we were happy that the cash that we got from the various avenues that Leslie mentioned, all of that happened really in December.

So we were lucky from accounting perspective, cash came in at just the time that the spreads were wide.

Yes.

Yes.

And what part of that book is variable rate at this point?

I don't know.

Is it -- it was a decent chunk previously.

Yes.

It had a really -- it's still a decent amount.

I mean, the duration is 1.42%.

So that tells you right there that a pretty significant portion of it is floating.

I don't have the number in front of me opening up, okay.

And our next question comes from the line of Brock Vandervliet of UBS.

Tail-end Charlie here, everything's been answered, I would say, other than with respect to CECL.

Any sort of early read on that?

And if not, when do you think you would be likely to release some sort of a guide on CECL implications?

Yes.

I'm -- let me say, first of all, I don't have a number that I -- I've seen a number, but it's not a number that I have enough confidence in to disclose it probably at this point.

A lot of work is still going on and a lot of analysis is still going on.

I'm very comfortable with where we are with respect to our implementation time line.

We will start running the 2 methodologies parallel this quarter, the first quarter of 2019.

In doing that, we will figure out what we don't know.

We'll learn what we missed, but we're going to start that this quarter.

So I'm highly confident that we're in a good position to implement the standard on a timely basis.

I doubt that we will disclose a number before the third quarter.

So much of this is dependent on what your economic forecast is at the time you implement the standard.

That has the potential to have a very material impact on the number.

It's going to swing pretty materially if you are staring recession in the face as opposed to if you're staring a period of economic growth in the face.

So I doubt we'd put a number out there before the end of the third quarter.

And that is all the questions we have today.

I'd like to hand the call back over to Raj Singh for any closing remarks.

Thank you, everyone, for joining.

We'll speak to you in 3 months.

Okay.

Bye.

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

That does conclude today's program.

You may all disconnect.

Everyone, have a great day.