BankUnited, Inc. (BKU) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to BankUnited third quarter earnings conference call. At this time, all participants are on listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. [Operator Instructions] And as a reminder, this conference is being recorded. And now, I'll turn the conference over to your host, Lisa Shim [ph], Senior Vice President. Please begin.

Good morning and thank you for joining us today on our third quarter 2017 earnings conference call. On our call this morning are Raj Singh, our President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call contains forward-looking statements within the meaning of the US 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 SECF filings. We do not undertake any obligation to update or revise any such forward-looking statements now or anytime in the future. And with that, I'd like to turn the call over to Raj.

Thank you, Lisa. Good morning, everyone. Before we actually start, I'm going to ask Leslie to make a statement and then we'll start the call. Leslie, go ahead.

Thanks, Raj. I just want to clarify something that is in the press release that went out this morning. On page two of the release, we state that there was $394 million of runoff in the multifamily portfolio, offset by growth of $291 million in other portfolio segments. In fact, a reclassification of a little over $200 million of loans between multifamily and other commercial real categories is embedded in those numbers. We will be filing an 8-K/A with a corrected earnings release, clarifying that this morning. Raj, I'm going to turn it back over to you.

All right. Thank you. Now, let's start this call. Good morning, everyone. Thank you for joining us for our third quarter earnings call. We're coming to you live from New York and extremely dry Florida. What a month it was, September. I checked this morning that the hurricane season is officially over. And I was told, no, the National Weather Service now considers November also to be part of hurricane season. So, it will be over soon. Nevertheless, our earnings this quarter, we posted $67.8 million of net income. That's about $0.62 a share. I think, last I checked, a couple of days ago, our earnings estimates on Bloomberg were $0.59. So, we're happy about beating by about $0.03 cents. Also, this compares to about $50.8 million in earnings in the same quarter last year or about $0.47. And if you look at it from a year-to-date perspective, I think EPS was up very nicely, almost 19%. Net interest income increased by $19.5 million dollars over comparable quarter in 2016, which is about 9% growth. Margin declined, as we had predicted. I came in at 3.62% for this quarter, which is down from 3.76% prior quarter and about 3.69% for the same quarter in 2016. The reason for this contraction, obviously, as you all know, is our high-yielding covered loans. As they runoff, they've been producing this headwind for us for a long time, but we've done much better than we had expected at the beginning of this year. Tangible book value grew to $23.83. That's about 8% – a little over 8% growth over the last 12 months. Let me talk a little bit about Irma because that was the highlight of this quarter. We were hit by Irma in the very early part of September. I would say that the story is about as good as it could be. Or in other words, this could have been a lot worse if Irma had actually hit directly to Miami. This was a glancing blow. The damage that Irma did was not really as much to our loan portfolio or to our facilities and premises. I think everything, at the end of the day, has turned out to be just fine. It have an impact on our momentum of growth in September. September is one of our busiest months of the year. August generally is slow. Third quarter is really a lot about September. And, in September, in Florida, we were practically shut down for business in terms of growing our loan book or growing any of the business. It also impacted some of our national businesses, such as Pinnacle and SPF, which while they're national, they do have a very disproportionate share of Florida exposure. To give you an example, Pinnacle, I think about 30% or maybe a little more than 30% of Pinnacle's book is Florida-based. So, those businesses were impacted as well. We are taking about a $5.5 million charge – $5.4 million charge or allowance for loan losses. Just to be on the safe side. We have done a pretty thorough review of our portfolio on the commercial side. We're still in the process of completing a review on the residential side. So far, we've not seen anything. But out of overabundance of caution, we are taking a $5.4 million reserve build just because of hurricane. The other big story this quarter in our numbers is the taxi provision. We had – as you know, we had solved for a valuation of $432,000 for each medallion last quarter. This quarter, we ran the numbers again. And using the same methodology, the same discounted cash flow methodology and using a 10% discount over whatever number we come up, we came with a new valuation of $351,000. In light of some of the transactions that we've seen in the marketplace that have happened and they've been kind of all over the place, we wanted to be even more conservative. So, for calculating our numbers for this quarter, we took another 15% haircut on top of that number. So, just to backup, our DCF methodology is solved for about 3.90%. We took a 10% discount that we always take. Brought it down $351,000. And in light of some of the transactions that have happened, we took another 15% discount on top of that, and brought our valuations to under $300,000 – just a tad under $300,000. To be blunt, we're trying to push this problem behind us. It is our only problem from a product perspective. That is one that bothers us. And we're trying to be aggressive about addressing it. $32.7 million, that's a provision that we took this quarter for taxi. So, between the $32.7 million we took for taxi and the $5.4 million we took for Irma-related losses – or potential losses, let's put it that way, that was pretty much all of our provision this quarter. The rest of the portfolio not only is holding in, it's actually doing even better and the provision numbers almost 100% allocated to those two items. We did take a $27 million or $26 million gain on sale of securities. And Leslie will talk about that. We've been sitting on these from the day we bought the banks in 2009. And she'll walk you through the details of that. The balance sheet growth for the quarter was less than we had expected, largely due to Irma. But a lot of these closings, which should happen in September, then get pushed out into October and we're seeing that volume of business happen this quarter. So, we will get some help from that this quarter. Deposits grew a little more than loans. This is actually the third quarter in a row that we had slightly more deposit growth than loan growth, which is one of our stated targets at the beginning of the year. Our loan-to-deposit ratio now is, I believe, at about 97%. And we're happy. We'd love to have it move down some more. But we're happy where it is. With that, I will turn it back over – actually, in my notes, annual net charge-off ratio for non-covered loans is 40 basis points and taxis at 33 basis points. And our NPLs are at 1%, but 60% of that – 60 basis points – was attributable to taxi. Just wanted to point that out. With that, I'll turn it over to Tom who will talk about loan growth and deposit growth in a little more detail before then turning it to Leslie, who'll talk about the P&L.

Great. Thanks, Raj. So, first on loans and leases, our non-covered loan portfolio remains very well diversified across our platform from Florida, national and New York. Today, at the close at 09/30, 35% was in the Florida portfolio, $7.1 billion; 31% in the New York portfolio at $6.3 billion; and 33% in our national portfolio at $6.7 billion. So, when you look at activity for the quarter, Florida grew by $223 million, our national platforms by $263 million and New York had a decline of $103 million. Kind of looking at some of the groups, in geographies, our C&I business has continued strong, growing by $362 million in the quarter. Our 1-4 residential business grew by $151 million. Our mortgage warehousing business continued strong growth, $126 million for the quarter. And total commitments in that business are now $875 million, which is up $337 million year-to-date. On the CRE side, Florida and New York combined declined by $94 million. Within that, Florida grew by $60 million, while New York experienced a net contraction of $155 million. And this market, which is a large multifamily market, we continue to see very significant long-term competition and transactional volume, particularly sales of multifamily units are down significantly. So, that essentially reached to the kind of decline that we're seeing, but we're continuing to make our asset category type loans. Our regulatory CRE concentration now as a percentage of risk-based capital was 267%. And as Raj mentioned, our other national platforms, which have substantial business in Florida, and also saw some Irma impact from that, declining $33 million. So, in summary, we're seeing, as expected, more balanced growth across the geographies and more balanced growth across the individual units and product categories. On the deposit side, we grew by $445 million during the quarter. That growth was well-balanced across all platforms, all units, and that despite a loss of one large account. We've lost a $200 million account during the quarter, which is a very unusual occurrence for us. Having been through that, then, obviously, our growth would have been significantly higher than the $445 million. And as Raj mentioned, our loans and deposit ratio is now 97%, which is consistent with our goal of maintaining this ratio of below 100%. So, Leslie will now give more details on the quarterly results.

Good morning, everybody. First thing I will show you is that the guidance we've given you for the rest of 2017 remains unchanged. We're currently in the middle of our annual business planning and forecasting process. So, we're not prepared on this call to discuss expectations for 2018 or 2019. But what we've put out there around NIM and expense growth and whatnot for the rest of 2017 remains unchanged. As to the net interest margin, the yield on the interest-earning assets was down this quarter from 4.65% to 4.60%, even though the yield on each of the individual category, covered loans, non-covered loans and investment securities were up, and that's primarily due to continued runoff of the covered loans as a percentage of total loans. Cost of deposits was up 8 basis points to 87 basis points from 79 basis points linked-quarter. As expected, given the late June rate hike, we knew we were going to see that start to materialize in our costs this quarter. The combined yield on the FDIC asset and covered loans for the quarter was 12.7% for the year. I expect that now to come in between 12% and 13%. Those numbers moved around a little bit because we did not, this quarter, execute our typical quarterly covered loan sales. So, that changed the timing of some of those cash flows and changed that picture just a little bit. The hurricane kind of got in the way of executing that covered loan sale. It's just not easy to sell loans where there is a concentration in Florida in the same month that a hurricane hits. So, hopefully, we'll be back on track with those quarterly sales in the fourth quarter. We did have securities gains this quarter outside to what we normally report. Those gains all related to bonds that we acquired in the acquisition of the failed BankUnited in 2009 at pretty deep discounts and bonds that were initially covered under the commercial shared loss agreement. Many of those bonds are either rated below investment grade or not rated and some of them are things that we just don't want to continue to hold in portfolio. We took some gains this quarter to help offset some of the addition provisioning we did around the taxi portfolio that we believe is unusual. We don't think we'll see that kind of provisioning around the taxi portfolio every quarter going forward. A little bit more about the hurricane and the impact that had and the process we've gone through to assess it. We are in the process of performing a very extensive borrower by borrower analysis of the impact of the storm on credit, including contacting each borrower in FEMA-designated impact areas. If where any indications of damage exists, we'll follow that up with collateral inspection. Our total exposure in the impacted area is around $7 billion in the commercial portfolio and just under $1 billion in the residential portfolio. And that's total loan balances in areas that were impacted by the storm. I don't mean to suggest that that's the total where we think there's been some damage. To date, we've contacted 100% of our commercial customers that have operations or collateral properties located in impacted areas and about 66% of the residential borrowers. The result of that has been downgrades of only $22 million in commercial loans to categories below past due to the storm impact. And about $400,000 in specific reserves of the $5.4 million provision that Raj mentioned relate to those $22 million of downgraded loans. We provided about $27 million worth of residential borrowers, with temporary payment release and provided some type of payment release to about $2 million worth of commercial borrowers and we expect another $5 million or so of that based on what we're seeing today. The majority of these have not been classified as TDRs due to the short term and insignificant nature of the payment really that's been provided. We did see kind of a spike in residential delinquencies at 09/30. But we saw most of those payments come in during the month of October. We saw about $30 million in the 30 to 59-day bucket at 09/30. And that's down to about $4.5 million as of yesterday. So, I think we just had mail delays and whatnot that led to a lot of those 09/30 payments coming in a couple of weeks late. In the commercial portfolio, there is only about $1 million in the 30-day bucket that was past due at 09/30 that hadn't been past due before the storm. So, not seeing anything that's – based on our conversations with our borrowers, what we're seeing in delinquencies, downgrades, we're not seeing anything that indicates that this is going to have a material impact on credit quality at the bank. As Raj said, reserves related to the hurricane at 09/30 totaled $5.4 million. $400,000 again related to both commercial credits that were downgraded and an additional $5 million qualitative reserve that we put out. The railcar portfolio, the securities portfolio, we've also done a deep dive into the exposure there. No impairment has been recorded to date and we don't expect there to be any. Obviously, the assessment is ongoing. We won't know the final impact for some customers for a few quarters yet, but I reiterate that we don't expect the impact to ultimately be material from credit perspective. Expenses that we've recorded to date related to the storms total approximately $600,000. And I don't expect that to grow to be a material number. We did waive and refund certain deposit related and loan late fees for a period of time in September, and the total wasn't material. A little bit more about the taxi portfolio. As you can see, our total provision for loan losses this quarter was $37.9 million. $32.7 million of that was related to taxi. Total exposure in the portfolio is now down to $121 million. That's down from $160 million at 06/30, mostly due to charge-offs. There were little over $4 million in pay-downs. Cash flows off that portfolio tend to range between $4 million and $5 million per quarter. As Raj said, we've continued to use our cash flow template methodology for valuing medallions. That methodology solved for a valuation of $351,000 this quarter compared to $432,000 last quarter. What we have done this quarter as we have charged all the medallions loans down to that $351,000 cash flow based collateral valuation. We've also this quarter moved the entire portfolio to non-accrual. We've debated this and decided, just given the level of uncertainty that surrounds the future of this industry and the long-term nature of the amortization of a lot of these loans, it was prudent to go ahead and move the portfolio to nonaccrual status. One of the benefits of that is, from this point forward, all the cash flow that comes in will be applied to principal. We'll see a little bit faster amortization of the portfolio. In addition to the partial charge-downs to the 351,000, in recognition of some of the option activity that took place this quarter at a lower price as well as the continued downward trend of valuation. We took an additional 15% haircut to that 351,000 and put out up a specific – although we didn't take charge-downs below the $351,000, we did put up a specific reserve based on that additional 15% haircut. That leaves about $13 million or 11% reserve on the portfolio after charge-offs at 09/30. And that would kind of translate to a net valuation, so to speak, of a little under $300,000. To date, $92 million or 77% of the portfolio sitting on the balance sheet have been modified in TDRs. Total delinquency still only total $13 million. So, the majority of these loans actually are continuing to pay. Charge-offs to date have totaled $58.3 million and $35.3 million of that was in the current quarter. We foreclosed on a total of 7 medallions to date. So, haven't had to do too much of that. So, that gives you a little bit of an update on the details behind what we did with taxi this quarter. And with that, I'm going to turn it back over to Raj to make some closing remarks.

So, overall, I'm happy where we came out on earnings. I'm very happy where we came out on earnings growth. Return on equity of this company is I think hitting 10%, which has been an important milestone for us. We also said this business model can get you 10% plus return on equity. I'm glad to see a print of 10% plus. Taxi, we're trying to be aggressive about it. Last quarter, when one of our peers had evaluation which is more conservative than us, it actually bothered me because I always want to be the most conservative. So, we took pretty aggressive stand over there with taxis. We did take gain on sales, sort of this security that have been sitting on for a long time for a rainy day like this, to try and blunt some of the pain from taxi. We certainly don't expect provision in taxi to run at that level. At the end of the day, it's only a $120 million portfolio. We're not going to have $35 million provisions every quarter for that. I'm very thankful that Irma did not have the kind of damage that it could have done. I look at Puerto Rico and I'm reminded of how fortunate we are. And I'm also happy with the momentum we have in the commercial business. Despite the slowdown in September, the flipside of that slowdown is we're seeing good momentum in October. So, October turned out to be a very, very solid month for us. The inevitable question, which I'm sure will be the very first one, so I'll try and answer even before it is asked. It is, what is the rest of the year or this quarter look like. I think low production based on the pipeline that we have and the business we've already done this month, it looks similar to the second quarter, which was I think it was $850 million or thereabouts. I think the way it will add up to that number will be different than how it added up in the second quarter, where, second quarter, there was a lot of tailwind we had from mortgage warehouse lending utilization just coming back up. That's not the case here. Here, it would be more about Florida CRE really coming back to its own. I think fourth quarter for Florida CRE could be bigger than the first three quarters combined. Mortgage warehouse variability is something that we started looking at towards the end of the year. I'm not sure where we will end up. But, generally, it starts to dip around Christmas and then it really dips in the first quarter. So, that's the one thing that I will just sort of warn about that it's hard to predict mortgage warehouse variability. But the underlying trends in mortgage warehouse lending, the commitment growth is still very, very strong. We're doing business this quarter as well. Again, I'm very happy with the way that business has grown. Deposit pipeline is also strong, but like I've always said, it's much harder to predict. And I wouldn't want to raise my hand and tell you what that would be because, honestly, it fluctuates a lot. But the overall pipeline is very, very strong. In Florida, in New York and our national businesses. If you ask me about competitiveness, what are the places where I see the most irrational behavior, I would say deposits from time to time I see irrational behavior. And New York multifamily, I see continued very tight pricing amongst all asset classes. The bond business also has been little tough this year in terms of pricing, but that might be feeling a little bit better in the last few weeks. Deposit pricing, just going back to – is stable. So, it's not going up anymore. And I'm happy to see that it's been stable for about six or eight weeks now. But, in December, from what I see, there's an 80% plus chance the Fed is going to raise rates again. And I think the competition will come back and that irrationality always sort of bares its ugly head right around the time the Fed raises the rates. So, we're gearing up for that happening in December. But, so far, it's fairly stable. With that, I will turn it over to you guys for any questions.

Thank you. [Operator Instructions] Our first question is from Brady Gailey of KBW. Your line is open.

Hey, good morning, guys.

Good morning, Brady.

Good morning.

So, Raj, if you look at loan growth and if you assume that $850 million is right for the fourth quarter, that means you all will have grown loans around $2.2 billion in 2017. And if you look at the trend, you grew loans over $4 million in 2015 – actually, $4.5 billion in 2015. You did about $3 billion in 2016. Now, you're at $2.2 billion. I know you guys are not ready to give 2018 guidance yet, but how do you think about just the trend of loan growth as we head to next year. Do you think 2017's run rate is a good way to look at BankUnited going forward or do you think we'll see some recovery up towards the growth that you all put up in like 2015 and 2016?

I don't want to venture into giving you guidance for 2018, but I will say this. This last year, year-and-a-half have been a year of transition for us, going away from our biggest business line, which is New York multifamily to really relying on everything else to grow the loan book. And that was not a small transformation. Remember, more than half our growth came from New York multifamily. And now, instead of actually posting growth, that is declining. So, that is a fairly large change. It doesn't happen overnight. It takes time. But that has – that strategy has been implemented. We don't want to do unnatural things to try and just grow businesses beyond what we think are the natural growth rates. So, I would say that as one thing. Second, I would also say when we were growing loans at the $4 billion, $4.5 billion range, which was maybe two or three years ago, there was a need for us to grow at that level. FDIC assets were running off. And if we didn't do that, I think you would have seen significantly declining earnings. And where we stand today, earnings growth is actually what we try and solve back from, right? We want to have strong earnings growth, what do I need to actually deliver that, what is the level of growth? Do we want to grow at 30% a year every year like we did three years ago? I don't think so. I think we still want to have double-digit earnings growth. We want to have double-digit deposit growth. And we'd like to have double-digit earnings growth. That's sort of the goal of the company.

Okay, all right. That's helpful. And then, maybe specifically on the multifamily issue, if you look at what multifamily has done just year-to-date, it's gone from about 20% of loans down to 16%. Maybe some of that is due to this reclass issue. Do you think multifamily will continue to shrink as a percentage of loans from this 16% level or has it pretty much bottomed out?

I think if the market conditions stay where they are in terms of pricing, it will continue to shrink because I just look at what the pipeline is in there and I look at runoff, unless you can get better pricing, which I certainly don't see right now, it could change. But if it stays where it is and the spreads stay where they are, we don't want to put capital to work at such high spreads.

Okay. And then, finally, from me, I think CRE to capital was 2.74 last quarter. It feels like that's probably down a little bit this quarter. Do you have an updated number?

I think it is 267.

267.

Okay, great. Thanks for the color, guys.

Our next question is from Jared Shaw of Wells Fargo. Your line is open.

Hi, good morning.

Good morning, Jared.

Good morning, Jared.

Just looking at the taxi medallion business, as I look at the medallion sales in the past quarter, it looked like the range was sort of the 400 to 530 if you looked at the median. What trends were looking at when you were looking at the weaker market? Was it ridership levels? Cash flows coming actually to the medallions? Or how much of that was the sales?

So, when you do our DCF analysis, we don't look at sales. We just look at ridership and average fares and so on. The data that we collect from the TLC. That gives us an evaluation in the high 300s, if you take a 10% discount to come to $351,00. But then going from $351,000 down another 15%, that was the result of the medallion sales that you mentioned. And the medallion sales, not that there aren't that many, there were a few this quarter and they were all over the place. They were in the 400s, but there were also a large sort of fire sale – a foreclosure fire sale that happened under 200. So, they were all over the place. And not trying to lean on one data point, we basically looked at this and said we want to be conservative, let's try and take another 15% haircut on top of the 351 and solve for our calculations based off of that.

Okay, thanks. You said you had seven repositions this quarter. How many medallions are actually your own right now?

That's the total, seven. Since the beginning of time, yes, we had seven.

Okay, okay. All right, thanks. And then shifting, you said that the loan sales this quarter – the covered loan sales were delayed. Does that impact your – you still have the ability to sell $250 million on a 12-month period. So, should we expect to see that fourth quarter could actually be – maybe more than double the normal quarter?

It may not be double. What we will do is the next couple of quarters we'll just have slightly higher levels of loan sales. And for the year, we will still get our 270 or 280, what about the number is often allowed loan sales done. So, we're not going to have two sales. We'll just do slightly bigger sales this fourth quarter and first quarter and second quarter, which is – is calculated off of May 21, the anniversary date. So, that's how we're going to do it.

Okay. And then, this is really the first quarter where we've seen accretion declining and where we've seen the movement from non-accretable to accretable further slow. Can you provide any update or guidance for the remaining amortization schedule for the accretable yield?

We'll have that number disclosed in the 10-Q as we always do. I think we expect – isn't there an accretable yield rolled forward in this press release? Yes. The remaining balance of accretable yield is $522 million. That's on page five of the press release. And so, that's what's left that will come in between now and roughly the middle of 2019 based on our most recent cash flow forecast.

Yeah. In terms of the timing, though, it should be thoroughly – fairly consistent, I guess, through the middle of FY 2019?

That's a little bit harder to forget. But the timing of some of these cash flows is a little bit harder to model, but certainly, you're going to see – that's the amount we think is coming between now and then and that time horizon now is getting pretty short. So, I think the quarter to quarter timing of it becomes a little bit less significant.

Okay, great. Thank you.

Our next question is from Stephen Scouten of Sandler O'Neill. Your line is open.

Hey, thanks, everyone. Appreciate it. A question for you. Just following up on maybe off of Brady's line of questioning on the multifamily reductions. Is there any further impetus from a regulatory standpoint for you guys to take that level lower? I know, Raj, you had kind of mentioned previously, you though the OCC might have a lighter touch with you guys in the back half of the year or you'd be kind of – have a freer rein to do what you wanted to do. Can you give us a kind of status update on that and how that's an impediment or not at this point?

So, I actually forgot to mention this in my remarks. So, we are seeing a very different tone from the OCC over the last few months or few weeks – I shouldn't say few months, few weeks. Whether that is a top-down thing because of changes in the political landscape, whether it is what we are doing, whether it's a combination of those things, I'm not sure. But we're seeing a much more reasonable approach from the OCC on various fronts. I'm in an examination exit meeting every couple of weeks and I'm seeing a change, which we're very happy for. And with regards to multifamily, I don't think OCC's views are any different than they were last quarter or even last year. They still think that the asset class has gotten ahead of itself and valuation in that collateral type are probably too optimistic. And that's what concerns them and they're concerned about refi risk. I don't think that has changed. The fact that we are shrinking the New York multifamily and have drawn our credit box and our pricing box in a way that production is less than our runoff, that certainly gets us cookie points with our regulator. No question about that. And as that sort of plays itself out, it only gets better and better from their perspective of what the risk profile in the portfolio is. The portfolio is doing very well. But having said that, long-term risk, whatever there might be, are reduced and that makes them feel better. But there has been a remarkable change in the tone at the OCC and we're very happy about that.

Okay, that's really helpful color. Thanks, Raj. And maybe as it pertains to the loan loss reserves, kind of ex the taxi impact and the Irma impact, I guess, essentially, there was zero reserve, almost $384 million in growth. So, how can we think about – I know, Leslie, you gave commentary on the strength of the entire portfolio ex those movements this quarter. But as it moves – would you expect to provision more in line with the kind of 70 to 80 bps we've been seeing on new growth or do you think there could be further core loan losses of releases moving forward?

So, what happened this quarter is, to your point, we did see a reduction in our quantitative net charge-offs factors that we use to determine the reserve. Those did come down a little bit. That coupled with little bit lower loan growth resulted in essentially a close to zero provision ex taxi and hurricane. We also had some reduction in specific reserves for specific impaired loans this quarter. All those things combined – I continue to think that that allowance as a percentage of loans in the near term would be pretty steady with where it is today. And over a longer-term, I continue to believe we will ultimately see signs that we are moving through a credit cycle and we'll begin to see that creep up. So, I don't really see anything dramatic changing there.

Okay, great. And one last one for me. As it pertains to the NIM, I know you said no real change to that 3.60% to 3.70$ kind of full year guidance. But, obviously, we saw a bigger move in deposit cost this quarter than we had seen in other quarters. I think slightly more than we had seen in other quarters, especially on the interest-bearing demand front. Anything specific you can comment to there. I know it's obviously driven by the rate hikes, but was there a reason why that seems to be a little bit greater than maybe some of the past quarter with a rate hike?

No, I think [indiscernible] more or less.

Yeah. Some customers wake up on the very first interest rate move. Others wait till three or four moves have happened and then suddenly call and say, oh, wait a minute, why am I not getting higher rates. So, we did expect betas to get higher and higher with each rate move, as more and more customers become proactive. So, it's not anything different than what we had expected.

And so, do you think there's some carryover effect of that still into the fourth quarter as a result?

I think fourth quarter – I'm looking at the rates over the last sort of 6 to 8 weeks, they've been pretty steady. But you have the December rate hike coming up. And usually, [indiscernible] will start calling you even before the rate hike happens. So, we will start seeing phone calls probably right after Thanksgiving. So, that will probably have an impact. But I think for the most part what has happened is already in our deposit costs.

Okay, great. Thanks, guys. Appreciate all the color.

The next question is from Ken Zerbe of Morgan Stanley. Your line is open

Great, thanks. Good morning. Raj, I know you talked about deposit growth outpacing loan growth, but, obviously, this is kind of an easy comp, given the impact of the hurricanes on loan growth this quarter. Did the hurricanes have any impact on your deposit growth this quarter? And do you think you can actually still make those claims next quarter if you do get loan growth sort of in the $800 million plus range?

I think, Ken, deposit growth, like Tom had explained, there was one account that we were not happy to see lose, but we did lose an account, which was fairly large for us. And it doesn't happen very often. But when that does happen, it really hurts the quarter. So, that was almost $200 million for us. Was there some impact on deposit growth? Some. Not as much as loan growth. Because loan growth, remember, we had to re-underwrite a lot of stuff that was in the pipeline in late August, ready for closing in September. We had to basically go back, do the appraisals and what have you, and a lot of wasted work, let's put it that way. That's not the case in deposit growth. But does it distract us when we're all trying to keep the bank up and running? It absolutely distracts, no question about it. But the impact to the loan growth was much more than the impact to the deposit growth because of Irma.

Got it, okay. And then, I guess, different question, just in terms of the outlook, if you do do the 100-plus-million dollars of loan growth next quarter, is it right to assume that you're going to have further runoff in New York City entirely because it seems that it would imply that the Florida piece of next quarter's growth, if we're right with guidance, is that it's going to grow, call it, the $200 million this quarter, plus another, I don't know, $500 million, right? Or is it a little more split between the national piece and Florida. I'm just trying to think like how New York runoff fits into the outlook.

So, our best guess of runoff in New York CRE – I'm not talking about New York overall. New York CRE for next quarter is less than it was in the third quarter. That's right over there. It will not be flat. It will be a little bit of runoff, but it will be much less than what it is right now. It's just a matter of what payoffs are coming up and how much pay-off activity we had in the third quarter. So, it is looking a little better from that perspective. Having said that, we're doing a lot more business in Florida, especially like – I mentioned about Florida CRE. Florida CRE could have a fourth quarter which is bigger than the first three quarters combined. And some of it is because of hurricane, things getting pushed out from the third to the fourth quarter. Some of it is just momentum is finally building up in CRE and we have room that has been created in our sort of – if you think of 300% as the threshold, there's plenty of room for us to grow CRE without coming close to the 300%. So, Florida does have more growth, but it's not like New York that's going to be this massive negative number next quarter. It's going to be a smaller negative number next quarter.

I would add that we also expect to see very good growth in the C&I businesses across both markets that we are in.

Got it. Do you think New York could be positive next quarter in total?

I think so, yes.

Great. Okay, thank you very much.

Our next question is from Ebrahim Poonawala of Bank of America. Your line is open.

Good morning, guys.

Good morning.

I guess two questions. One, Raj, in terms of – when you think about the stock and your comments about growth and not needing to grow at the rate you had to two years ago. Can you talk about just in terms of capital, how you view the bank credit? Do you think you have excess capital where you could use some of that to buy back stock or what the right level of capital is where things stand today in terms of the growth expectations?

As we stand right now, you could make the argument that we have some excess capital. And you can do two things with it. We can go ahead and buy back stock because we do feel our stock is lagging compared to our peers. Or you could wait and deploy this capital over the course of the next 12 months. If we do go ahead and do a buyback at this point of time, then we will have to go out and issue new capital fairly quickly if we have to do any meaningful amount of buyback. So, with that in mind, our strategy has been to just keep our head down and deploy this capital. If you feel that we get to a place where it is not going to get deployed, which is not the case at all, then buyback becomes much more interesting to talk about. But I don't want to a buyback and then have to issue capital immediately for the buyback that we just did. So, there is – you can build ROE both ways. And I think, right now, where we are is we'll deploy this capital over the course of next 12 months or so.

Understood. And then, if you can just talk about the FDIC loss rate that comes up at the end of May 2019, just some high-level thoughts around how you think about that portfolio. I guess, you will exercise your option to sell those assets once we get within the nine-month period. If you can just talk about how we should think about that. That's also going to generate some capital. How do you expect to deploy that and make up for some lost earnings as well?

I've not talked to the FDIC in some time. I do intend to talk to them as we get closer to this. Because, remember, we have the option to sell parts or all of the portfolio. But the FDIC has then the option to ask us not to do it and automatically extend loss share for two years. The last I spoke to them about this matter, and I asked them what their preference would be, they had said their preference would be not to extend loss share and let us go through whatever sale. But that's a little dated. That's almost a year-old information. And as we get closer to it, based on who is in charge of the FDIC at that time and various people and what they views are, they will let us know what they want to do. I think they will want this to end and not have to extend another two years. And my best guess is that we will sell probably not all of the portfolio, but part of the portfolio. We might sell all of it, but that analysis is to be – it is still to be done. Will it have an earnings impact?

In theory, it should not.

In theory, it should not have an earnings impact. We are in our planning cycle this year. We are – obviously, we always plan for three years. We're going to have – we might give you a little bit more guidance in 2018, the first earnings that we do in 2018, not just about 2018, but give you a little more guidance around 2019 as well, specifically, as it relates to this matter. But I'm not ready to do that at this point.

And as a follow-up to that, you don't need to quantify, but I recall you mentioned this before that when we get to the point where you start selling some of those assets, there is some degree of expense leverage associated with that that you can flex. Can you at least talk about sort of how significant that could be?

We're not ready to do it at this point. We would do that at a future date.

Understood. Thanks for taking my questions.

Next question is from Steven Alexopoulos of JP Morgan. Your line is open.

Hey, good morning, everybody.

Hey, Steve.

In terms of the loan production, Raj, being impacted by the hurricane, what do you estimate the impact to third-quarter loan growth was from Irma?

We were actually talking about it this morning before the call. It's hard to say, but probably $150 million, $200 million, in that range. Maybe $200 million. Tom is saying $200 million.

$200 million.

$200 million? Okay. Thank you. And, Raj, you mentioned a few times that commercial real estate growth was really strong in Florida in the fourth quarter. What's driving that? Can you give us some color behind that?

Steve, it really that we had applied the brakes about a year ago on CRE, north and south. Okay? We started changing gears sort of middle of the year where we said, okay, New York multifamily, we're still going to keep the brakes on and probably even harder, but we're going to start growing the south CRE business. It doesn't happen as quickly as you would think. It takes a couple of quarters for that to happen. And this was the quarter when this was supposed to happen if it wasn't for Irma. So, now, it's gotten pushed to fourth quarter. So, it's just a natural sort of changing gears that we started doing about six months or four months ago, and it's coming to its own and it will realize growth in the fourth quarter.

Okay, okay. My understanding is, whereas the OCC is not that thrilled over New York City multifamily, they are okay with diversified CRE, like you might be putting up in Florida. Do you agree with that?

That's correct.

Okay. And then, Raj, this large deposit account that you said you lost $200 million. Was that tied to rate? Can you give us some color on why you lost such a large account?

No, it was not – listen, it was a high rate account. No question about it. But it was not tied to rate. It was a situation where – it's not like we lost it to another bank. We lost it to other uses of cash. I'll leave it at that.

Okay, got you. Okay, thanks. And if I could squeeze one more in, the large deposit team you guys listed out, it's over a year ago now. Can you give us a sense how good of a job are they doing? What are the balances? What are the cost of deposit that they have today? Thanks.

Yeah. So, they are doing a great job. They've been with us for five quarters now. Right, Leslie? About May last year is when they came over. And so, really, for the last year is when they've been productive, that they've been bringing in business. They had a slow first quarter, they are a very solid second quarter. Third quarter, I would say, was decent, but not as good as the second quarter. If I look at the three-year business plan that they put together when we launched that business on a sort of quarterly basis, and compared to where we are, I would say that we're about three months behind in what we thought we would be at this point of time. So, overall, still we haven't given out exact numbers for what they would do, but it's not in the hundreds of millions. They are well north of a billion, of where they are at this point of time. The cost of funds is high because they don't have a very high DDA component. But the DDA build is happening as we speak. The first year was all about trying to build money market and getting our name in front of people who had never heard our name. So, as DDA builds up in that business, I expect that cost of funds to drop. But, really, the first year, year and a half was about getting our name out there and building [indiscernible].

Okay, great. Thanks for taking my questions.

Our next question is from Dave Rochester of Deutsche Bank. Your line is open.

Hey, good morning, guys.

Good morning.

Good morning, Dave.

On the expense guidance, ex the FDIC asset expense, I think that was up single digits going into this quarter. I was just wondering if you still feel that way about expenses this year because that implies a pretty big step up in 4Q. I was just wondering how you think about that.

There is a possibility it will be a little bit lower than that, but I don't really want to put revised guidance out there.

Sure, okay. And then, just as you are looking out into 2018, I know you're not going to give guidance on 2018 today, but have you seen anything today that would really drive an acceleration of expense growth next year, any factors that you're thinking about right now?

No, I really want to just hold off on giving any 2018 guidance until the next call. We're in the middle of the budgeting and forecasting process right now and I don't want to miss the –

Sure, okay. Just switching to CRA concentration, appreciated that color there. Are you thinking at this point you guys just won't cross the 300% threshold and could that be helpful for you?

I think for the foreseeable future, we'll stay under 300%.

Okay. And then, on deposit growth, it sounds like you're not expecting any real positive impact from Irma at this point. Is that fair to say just from either insurance [indiscernible] anything like that?

Yeah. It just wasn't as big a story in terms of the damage that it did. If you have a situation like Katrina or what's happening in Puerto Rico, then the FEMA money and the claims from insurance can be pretty large. I just don't think that the amount of damage and the resulting insurance proceeds are really that material that it will have any impact.

Okay. And then just one last one. In terms of the competition on deposits, did you guys change your earnings credit rate at all? And are you seeing your competitors do that?

We are seeing that happen. It's more sort of on a one-off basis rather than a wholesale change. But from time to time, the larger, more sophisticated commercial customers are coming back and asking for higher earnings credit rate. But it's not across the portfolio.

Have you guys changed your and how do you compare versus where the market is right now?

We have changed it where it has made sense. And earnings credit rate is just another way of talking about interest rates on deposits, right? It's just interest in kind instead of interest in cash. That's how I think of ECR. So, interest rates on deposits have gone up, given the Fed rate moves just as ECRs have. But, again, you don't try and do it wholesale. You try and do it wherever you have to. And often, this is the result of customers calling in and demanding it and then you negotiate it based on the profitability of that customer.

Are you guys finding that you're generally in line with where the market is or you're a little bit higher, lower, just any sort of color?

I think we are in line. But, again, it depends on who you compare yourself to. Bank of America, obviously, has lower ECR rates than most midsize banks, including us. But if you compare us to our friends of our size, pick a name, Signature, First Horizon, somebody like that, then we are in line. But the bigger banks have an edge.

Okay, great. Thanks, guys.

Our next question is from Lana Chan of BMO Capital. Your line is open.

Hi. Good morning. Just a question around the securities. You had some build in the securities portfolio this quarter and you saw the yields moved up despite some of the volatility around the long end of the curve. Could you talk about where the new investments, which buckets and –

Actually, we invested in several different securities classes this quarter. I think the single largest build was in our agency – the various agency portfolios is where we invested the majority, building our liquidity pool and also with the tight spreads that are out there now. That's where we've been seeing the most attractive opportunities. We did have some investment in other asset classes and CMO is a little bit in the muni space. So, you'll see when we put the 10-Q out. A few different things. But the single largest was in the agency area this quarter.

This year –

Yeah. This year entirely, but this quarter in particular. Additionally, a lot of the pickup in yield that we got has been from coupon rate adjustments on floaters. So, that's been probably the single largest driver of the pickup in yield.

As you know, we keep our securities portfolio fairly short compared to our peers. So, that helps you in this environment.

Okay, great. And then, just a follow-up on the CRE, pricing, you're seeing in Florida versus what you've seen in New York, is it better because of potentially less competition and is it improving with the recent improvement in the long end of the curve?

There is a remarkable difference between Florida and New York in terms of pricing. There is also a big difference in terms of structure and kind of covenants that you can get. I'm not comparing all CRE in New York. I'm comparing New York multifamily to all CRE in Florida. Also, we are able to actually get away with a pretty high percentage of our loan portfolio being floating in Florida versus New York, which is all fixed rate – five year fixed-rate portfolio. So, there is a big difference.

Okay, got it. Thank you very much.

Our next question is from Erik Zwick of Stephens. Your line is open.

Good morning.

Good morning.

Good morning, Eric.

Maybe first just looking at the noncovered loan yields, they were relative flat quarter-over-quarter. And, I guess, I had expected maybe some potential improvement given the June rate hike. First, maybe what held those yields in check? And second, do you have the average yield on loans originated in the quarter?

So, both your questions – the average yield on new loans this quarter was right around 4, just under 4 on average across the portfolio. Of course, there wasn't that much production this quarter, which is one of the reasons – it's a part of the answer to the first half of your question, why we didn't see as big of an impact as we might have seen, is that we just didn't have that much production this quarter. We also had – there's just a lot of cats and dogs in there. We actually sat down and did a pretty deep dive look at that because I had the same questions. But it's a lot of cats and dogs. We had a little bit more prepayment penalties last quarter. We had a little bit more non-accrued interest connected last quarter. This quarter, we put on the taxi medallion loans on non-accrual. So, we had a reversal of interest related to that. So, just a lot of little different things that led to that phenomenon. No one big thing. But I think we didn't really see a big impact from higher rates on the new production just because we didn't have that much growth compared to the size of the portfolio.

That makes sense. And then, I guess, with the expectation for December Fed funds increase, what would you expect the impact to the NIM to be? And I understand you're not ready to give 2018 guidance, but maybe if you can frame the answer with respect to how you view your interest rate sensitivity today?

So, interest rate sensitivity, there is very little. We manage the balance sheet to a pretty risk neutral position from an interest rate risk perspective. So, the growth balance sheet is likely asset sensitive. But, frankly, a pallet shift, up or down in the curve, doesn't hand a huge impact on us. We managed it to a pretty neutral position. We don't make that [indiscernible].

Okay. One last question for me on the noninterest income. The service charges and fees were down quarter-over-quarter. And I guess I'm curious what drove that decline and whether you waived any fees for water was impacted by the hurricanes.

Yeah, we did. We did waive fees, frankly, for borrowers whether they were impacted or not. We waived fees for everybody in Florida both on the loan and certain select fees on the deposit side during the month of September. So that they do have an impact. I don't have that exact number in front of me. I don't think it was material, but we're certainly seeing that in that fluctuation quarter-over-quarter.

Are those impacts ongoing in the fourth quarter or would you expect to see some rebound?

We only waived for the month of September. So, I think it would normalize, I should say, I would think in the fourth quarter.

Great. Thanks for taking my questions today.

Thank you. There are no further questions at this time. I would like to turn the conference over to Raj Singh for any closing remarks.

We are very happy with where we are at this time and evolution of the company. We're seeing good momentum in the fourth quarter. We're very happy about that. Like I said, very happy not to be talking about hurricanes in the company, which is, at one time, seemed like all we were doing in September. And the big highlight for me this quarter was hitting an ROE of 10.2%. So, with that, I would like to thank everyone for joining us on the call. And I'll talk to you in 90 days. Thanks, bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.