BankUnited Inc
NYSE:BKU
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BankUnited Inc
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Good day, ladies and gentlemen. And welcome to BankUnited Incorporated 2018 Second Quarter Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to our host for today, Senior Vice President, Lisa Shim, Head of Corporate Development, Strategy and Marketing. You may begin.
Thank you, good morning and thank you 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'd like to start the call by congratulating Ken Taylor [ph] getting his deals filing 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 am sure that's more exciting, than our call, we think ours is exciting but I understand we're looking at the stream 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.
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 was $0.60 a share or about $66.5 million. So that's 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 this quarter it's $0.59, which is 9% growth just over the last three months. So if you cut me along that trajectory we'll be in a very good place and that's I'm very happy to report that.
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, but we don't control the respond to that’s the environment that’s the economy and regulation and so on. So it will be divided into three categories there is the economy, there is regulatory and legislative environment and third is the rate environment.
So when it comes to economy, the best way I will describe it is I have -- the optimist sitting on my right shoulder and the pessimist sitting on my left shoulder. And the optimist all day argue 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’d 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 [indiscernible] bill, while it doesn't impact us 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 of those things, the economy, the legislative and regulatory environment are much to celebrate about.
The rate environment is tougher than it was this time the last quarter where we spoke to you. The current while is not totally flat it's getting pretty flat. So 2 out of 3 is not bad and I'll take those two any day, especially the economy since that’s sort of the primary driver of bank's 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, that’s why we also divide them into two broad categories and say fixed rate lending and floating rate lending. Fixed rate lending is under tremendous model pressure, spreads are very tight. And I would say in some places where they're irrationally tight.
Floating rate lending is a different story, while spreads are a little tighter they’re not irrational, there is still good business to be done and we are as a result focusing more on floating rate lending rather than fixed rate lending.
Now what falls into fixed rate lending is commercial real estate, including multi-family. 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 and describe where the growth was and was and you'll 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 consumer issue we're seeing. Very aggressive competition emerge from players not just small, medium size, 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 the numbers, our earnings net income -- net interest income came in at $246 million. Margins, net interest margin actually grew from 3.56% last quarter to [indiscernible] and Leslie will get into the details of that. Last year at this time it was 3.76%. It has on a another 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 it went from 104 to 119 basis points, mostly because of the Fed increase in 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 shrink this quarter by $62 million. And again it's pretty -- the combination is pretty much fierce across the board. There is not one area of the bank 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 question 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 is somewhat less clear view of where it will be in fourth quarter. What I will say is, while we had 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 deposit pipelines are, we know what mandates we want, where the deposit is coming in from, the timing can be very difficult to pick 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 remained strong. Taxi, which is now down to some $87 million or so, it’s still the pain point that we continue to feel. Our non-performing loans, our non-covered non-performing 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 it is coming up; it will end in second quarter of 2019. We have a nine-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, it’s in the nine months that you have to do this to button down the final loan sales.
So, when that happens, what we are betting 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 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 contracts we do, we have an annual loan selling capacity of about $280 million. We don’t do an annual sale, we do four 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 will 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’ll 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 in our deposit books. 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 pay-offs and both in terms of deposit velocity, we’re seeing numbers that 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 activities 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 because the economy is healthy and we’re getting -- these loans are getting paid off sooner than we expected them. But nevertheless, it creates headwinds when you are 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 had parked money here and there are instances where they have parked money here for three, four, five 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 are doing buybacks, they are paying down debt, they’re acquiring other things, they’re acquiring properties.
So, that has created a fair amount of headwind in deposits. It’s not just about deposit pricing and competition, it also is use of funds. In fact that is the number one criteria of all d outflows that we saw in deposits. There are a lot of new account sales, but we saw a lot of outflow which is why the total number was negative $62 million. And the number one reason, because I am 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 number one reason, number one 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 putting it into a financial assets gets people just buying treasuries or munis, which are yielding better than what bank deposits are. When you can get a two-year treasury 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 in 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 we’re trying to balance quality versus quantity because directionally both of 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 will be strong. We are taking down the estimates 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 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 non-covered 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. CRE in Florida did decline a little bit as Raj mentioned, primarily impacted by heightened level of pay-offs and in Florida, most of these were driven by assets sales.
In New York, the multi-family market continue to decline and experiencing net run-off of $215 million, as we continue to see few opportunities to put that money out of the attractive risk adjusted returns, especially with what we're seeing in the tightness in fixed rate market in the New York market with properties generally going to the agency and CMBS markets. Like Florida, we did see good growth in C&I markets, again predominantly in our middle market banking teams with $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 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 the yield that 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 give you two examples of that, deposits in our Florida retail network, which is predominantly consumer and small business accounts grew by a net of $136 million for the quarter. Combined our Florida retail and private client services group grew non-interest 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 non-interesting 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 and 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. And we received word in over the couple of weeks and many of you probably saw the press release that Moody's have upgraded the company's issuer ratings from BA1 to BAA3, so that's now an investment grade rating. Not only is that a real positive for us with respect to any future preferred stock or debt issuances. We think it will 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.
Little more detail on quarterly results. We 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 non-covered and covered loans as well as the investment securities portfolio.
The yield on non-covered 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 of 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 150.
Reminder that the tax equivalent yields on both non-covered loans and on investment securities when comparing it to the prior year 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 costs of our FHLB advances, those were impacted both by general rate increases and also by some hedging we’ve been doing over the past two quarters extending out the term of some of those borrowings even though that costs 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 is down from the second quarter of the prior year due again to the continued run-off of those high-yielding covered loans. So, that’s a trend that had been continuing for some time.
Couple of comments on the provisions, the provision related to non-covered loans was $8.7 million for the quarter compared to $12 million for the comparable quarter of 2017. The provision this quarter related to taxi medallion loans was $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 pay downs. 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 30th 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 a non-accrual.
Forward guidance, Raj already updated the guidance about loan and deposit growth. Last quarter we gave NIM guidance of 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 certainly is deposit pricing.
We are bringing our non-interest 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 projected, which should bring with it a slower rate of as expense growth as well.
Couple of numbers that I gave as we want to see the future estimated accretion on covered loans as of June 30th is $341 million and the future estimated amortization of the indemnification assets is $104 million. So net of a marginal tax rate of 26.5% that's $174 million in earnings were projected to come in between now and the second quarter of 2019. Again all that's predicated on the assumptions the most probably 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 will be less income in the near term and little bit more income in the long term, but given that our highest probability is still to sell all the loans I can't really quantify any of that 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.
Thank you. [Operator Instructions] Our first question comes from Dave Rochester of Deutsche Bank. Your line is now open.
Hey. Good morning, guys.
Good morning.
Hey. On the loans, appreciated the commentary on the pipelines, but was just curious what your assumption was for pay downs in the back half. Because as you were saying those have been elevated and that has a way of cutting in to get loan production. So just wanted 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 just sort of how the corporate book works. You kind of see that every quarter from the difference between our production and ending that 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 pay offs.
I would say our growth guidance that we just gave you in corporate, 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 in the first half. Are you just assuming that that pace sort to continues through year-end or are you expecting a little bit of a slowdown on the pay-offs?
No there is no expectation of a slowdown. That's the environment we're in and we have to assume that until we see signs of a different environment.
Okay. 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 your incentives to value non-interesting bearing production more. So just curious how that's going?
Yes, so they have brought in DDA, it's -- they are being measured over a course of a year. We have more DDA in the pipeline, I'm certain that will close. But for the end of the year, hopefully at the 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 two -- more than two years have been here it’s been pretty strong.
So we're happy DDA still is a tad under 10% of their portfolio. And we're hoping that they will get it up to about 50% range before the end of the year. That's where they will be for this year.
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, let me do that. So, first quarter we bought back around $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 it is a line of sight for deploying capital over a reasonable period of time, let’s hold on to it, if not, give us back. And give it back in the form of buyback rather than some one-time dividend rates like that.
So, we will meet with our Board. Again, I think it will be a discussion for our November Board Meeting. At that point of time, once we’re done with our $150 million, there is always a possibility if we see less growth and excess capital then we will do another buyback.
So, you’re thinking you’d 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, if the stock goes to $50 maybe not, but if it stays where it is then, yes.
Got you. Okay, great. Thanks, guys.
Thank you. Our next question comes from Jared Shaw of Wells Fargo Securities. Your line is now open.
Hi, good morning. This is actually Timur Braziler filling in for Jared. Just looking at your deposit strategy and the growth projection for the back-end of the year, it 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 pipeline and we looked at the campaigns that we are running. So, it’s not trying to get it on any one big campaign that we have some 17 months CD spread [ph] or anything like that. It really is a client-by-client analysis on the commercial deposit. Remember we have more commercial deposit 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 build-up we expect over the course of next two or three months.
Like Tom was talking about the loan pipeline, any pipeline is about what is coming in and what is going out. On 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 our 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 is 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 and -- but the best prediction that we can give you is we should hit high single-digits based on what we see at this point in time.
Okay, that’s helpful. Thank you. 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 we are -- May date 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 and approval has it be taken in considering 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 nine months of the contract. So, that nine-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 entire portfolio or part thereof. All 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 law share automatically extends for two years. And then at the end of two years, we again have the right to sell, and at that time the FDIC does not have the right to ask us 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 sales, 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 under the annual loan sale clause of the contract. That we're going to try and get done this quarter so that the only can left after this is a final loan sale, whether it happens I don't think it will happen in third quarter, because the timing is -- there is not enough time.
So whether it happens in the fourth quarter or first quarter or second quarter it will 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 date as 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 true, yes.
Great, thank you.
Thank you. Our next question comes from Ebrahim Poonawala of Bank of America. Your line is now open.
Good morning, guys.
Good morning.
Good morning, Ebrahim.
So I wanted to first I think get a sense and I'm sorry if I missed it in your prepared remarks, but in terms of deposit betas, Raj, 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 two ago. And just overall, how you're feeling about betas today versus six months ago, 12 months ago?
Ebrahim, betas are increasing. Because more and more customers are getting the news that the Fed has moved and they should expect the higher rate. The older the client has been with us and the more products that we have sold to the clients especially in the treasury management side the better the betas, the lower the betas there is no question about that.
So by definition if somebody came in about a month or two ago, and they have not yet been sold a lot of treasury management products, the beta tends to be higher. Somebody came in four 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 the -- let's say there is an account from three or four years ago it was not for treasury management from us, beta will be higher and that's sort of part money. So our attention always is bring them in and sell the treasury management because if not, you know you will end up having a low margin customer on your balance sheet do this on their own 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 when you look at local competitors both on the deposit and lending side?
We’re happy to see that deal get done it's always good to see some M&A actions especially in your backyard. All I would say 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 you can tag along in terms of FDIC, is it fair to assume that when come around third quarter or earnings around 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. We’re not talking to you about loss share and all those funky accounting. But I realistic -- within realistic, we’re modeling as of 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 hard 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 maybe a couple of hours. So, it’s not that complicated. There is obviously no contractual impediment in doing the deal. But it’s just -- it’s just the noise that it creates in the numbers, which like I said if you are willing to spend half a day diving into it on the accounting side, you can figure it out.
Understood, thanks for taking my questions.
Thank you. Our next question comes from Stephen Scouten of Sandler O’Neill. Your line is now open.
Yes. Good morning, guys. How are you doing?
Hi.
Good morning.
A 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, 2019 or more 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 is 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 just thinking about the loan betas and the deposit betas, I mean, your quarter loan yields, I guess, went up a little less than your interest-bearing deposit costs. So, is that a phenomenon we should expect to see continue? Do you think you will see more pressure on interest-bearing deposits and a 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 is looking to talk about loan betas and deposit betas, that’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’m talking about not the covered loans, talking about our non-covered loans, went from 3.83% to 3.96%, that’s about -- what about 13 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 our securities portfolio is predominantly floating rate and is much lesser duration.
So, overall, if we’re starting at since I can’t do that math quickly enough in my head, I think they moved better than what deposits did. But I would again say that that’s a very high level simplification of looking at margin, there is a lot that moves on inside of 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 a basis point or two.
Yes.
Yes, that’s fair. Okay. And last one for me maybe on the 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 were in the call, so 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?
Yes. 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 the real commercial deposits. There is a very clear demarcation between what I would think of as excess money that people parked with you, and core operating deposits that people have with you. The deposit betas are very different in those two categories and that’s what we’re seeing.
So overtime, just like we're doing on the lending side, we're also work on the deposit side trying to basically grow the business in a true profitable core sense and not grow it through business that is very price sensitive and transactional in nature. So it's not something you can achieve overnight it takes time. But that sort of the chart both on lending side and on deposit gathering side. There is a big difference between core business and transactional and non-core business. That's what we're seeing on the commercial side.
But combined, yes, the deposit betas are high for commercial, but it's sort of a barbell thing that we're seeing. What I'm pleasantly surprised is the consumer beta that are actually been lower than what we've thought they would be. And -- but the story is not over there yet. We will see what happens the Fed pretty much told us they cannot be raising rates where as far as I can see. We'll see what happens.
No that's helpful. Thanks for the delineation Raj. Appreciate the color, guys.
Thank you. Our next question comes from Steven Alexopoulos of JPMorgan. Your line is now open.
Hey, good morning everybody. Not to beat the dead horse, the deposit beta side. But I'm really confused trying to figure out this rising in deposit costs, particularly given that balances fell. But essentially where 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.
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 have gone aggressively on money market instead of CDs you would have seen lesser increase in deposits and deposit costs. But we thought given where our CD maturities were for last quarter we wanted to make CDs the front in center for that quarter. Also where they currently is, if you measure from a spread perspective, we saw better pricing on a spread basis in one year CD, but not at a rate obviously rate is higher for one year CD than it is for money market.
But we may call these efficient rates on spreads rather than rates. And we thought 12 month is a better place to be. So that's also impacting where the movement in deposit pricing.
Okay. And Raj you said there were some newer competitors on the deposit front, it was unexpected. Who are you seeing now?
So I was -- this is anecdotal, but I'll tell you that we've lost business at rates that make no sense to people as unusual as TD Bank for example. You’d 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 ended the midpoint. Is that about what you're thinking for this year?
I'm sorry. Say it again, Steve.
So period end loans were up at 8% at the midpoint of 2018. Is that about where you're estimating now for the new full year?
We're up 8%.
Period end loans are up 8% at the midpoint year-over-year?
No, trailing 12…
12 month we’re about 9%. Is that what's you're referring to?
I'm looking at total, yes.
Trailing 12 months we’re at about 9% I think, and we're expecting from December 31st to December 31st probably be in the same single high digits.
Okay. And what are you assuming on a commercial real estate front? What's embedded in that guidance?
What -- continue run-off in the New York book and slightly positive in CRE Florida, but not a lot of contribution from there.
Okay, thanks for taking my questions.
Yes.
Thank you. Our next question comes from Austin Nicolas of Stephens. Your line is now open.
Hey, guys. Thanks for taking my questions. 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, the broader question assuming the economy stays in that optimist view. And you still see pay-offs of where 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're expecting the same kind of seasonality here.
And so, 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-digits. But I would not take first six 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.
Understood. Well, thanks for taking my questions.
Thank you. Our next question comes from Lana Chan of BMO Capital Markets. Your line is now open.
Hi, good morning.
Hey, Lana.
Hello, Lana.
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 the 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’re necessarily be in the quarterly run rate.
The leasing business, an important part of the revenue is residual income. This business was started three, four years ago and it takes time to build the book for that book to start then producing this kind of residual income on the bank end. So, we’re just beginning to reach that point where some of the leases, the earliest leases we’ve 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 sort of 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 on the bank end.
Okay, thank you. And 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 neighbourhood of where it is now. We also had the impact this quarter, which brings that down a little bit of taking more charge-offs on the taxi portfolio 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.
Okay. Thanks, Leslie.
Thank you. Our next question comes from Dave Bishop of FIG Partners. Your line is now open.
Yes. Good morning, guys.
Good morning, Dave.
Good morning, Dave.
Just turning back to -- I think you mentioned there were some impact in terms other -- the positive from the underlying economic activity, 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 in the economy?
It’s hard for me to give you a number. This is more just a very granular 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’s -- I don’t have a number that I can give to you, but on my various calls that I’ve -- it’s almost a daily occurrence where I’m always checking why somebody -- why some business left.
And then that is by far the number one reason that money being used for stuff.
That's a good sign at least our clients are the ones that are doing the acquiring and buying eventually those opportunities come back to us.
Got it. And then maybe a question to Leslie, security yields this maybe a little bit of repositioning maybe or remix. Do you think that that yield holds up and maybe grows from here? And maybe from a balance sheet ratio, I think we ended up about 24% assets up a little bit. Do you think that ratio holds you it stick to grow that, just curious in terms of directional change in balances and 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 this will impact from our book and just talking about all the fixed income assets out there. My comments 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 and look bond market has been tightening and tightening and tightening for now better part of two years not more than two years.
It was only in the last quarter, this is the first time after maybe seven or eight quarters straight of tightening that we saw some widening of spreads in the fixed income market, which I'm hoping this time, 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 tend to be the smartest money, tends to be the -- show the rest of the market where things are headed.
So I'm hoping that eventually leads into 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 brought 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 sort of nowhere near where spreads were in 2016. But they have at least bottomed out towards the bottom was the first quarter of this year.
Got it. And then just one follow-up question. Maybe just make sure I heard you right, covered loans sales this past quarter and second quarter and what you expect next quarter? I think you said you might look to ramp that up to the $150 million mark.
Yes, we will.
And that's really Dave taking the sales that we would normally spread out of over several quarters and combining them. So…
Got it, thank you.
Thank you. Our next question comes from Brock Vandervliet of UBS. Your line is now open.
Good morning. I was just trying to 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 once and done really with higher performance or performance returning to the norm I should say in the second half. And how do -- how confident are you that we see that?
Again looking at the pipeline as you looked at it as recently as two days ago it is certainly achievable. If my confidence level the same as it is on 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, so some of those came off this quarter. But we don't usually get into a lot of detail about the specifics of what those are.
Okay, thanks.
Thank you. Our next question comes from David Chiaverini of Wedbush Securities. Your line is now open.
Hi, thanks. 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 customer sight 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 -- a lot of times larger companies would have investment policies that will mandate that they do business with banks with the certain ratings, 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 but our deposit business, it’s just a 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, which were sitting at the doorstep and now can come in, that’s not -- don’t expect that.
But it helps a lot of people over the course of the last couple years, have sighted 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 relationships or growing those relationships. It's hard to quantify what that will be, but it is -- nevertheless, it is positive news. And our deposit gatherers will focus on larger commercial business are quite excited about it.
And this would be like the institutional, municipal, large corporate kind of space.
Yes. It’s not small business 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 what’s going in for that?
It’s 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 would have to hire, you don’t need to lease new space for them to sit in, just generally. But most of that would probably be in the comp volume because frankly that’s the line where most of our expenses are not for any other reasons, but it just corresponds to a little bit slower growth rate.
Thanks very much.
Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over Raj Singh for any further remarks.
Thank you very much for joining us, taking the time. I appreciate your interest in the company. We’re excited about where we are and 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.