BankUnited, Inc. (BKU) CEO Rajinder Singh on Q3 2018 Results - Earnings Call Transcript

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About: BankUnited, Inc. (BKU)
by: SA Transcripts

BankUnited, Inc. (NYSE:BKU) Q3 2018 Earnings Conference Call October 24, 2018 9:00 AM ET

Executives

Lisa Shim - Senior Vice President, Head of Corporate Development, Strategy and Marketing

Rajinder Singh - President and Chief Executive Officer

Leslie Lunak - Chief Financial Officer

Thomas Cornish - Chief Operating Officer

Analysts

Kenneth Zerbe - Morgan Stanley

Brady Gailey - Keefe, Bruyette & Woods, Inc.

Stephen Scouten - Sandler O'Neill & Partners LP

Jared Shaw - Wells Fargo Securities

Lana Chan - BMO Capital Markets

Steven Alexopoulos - JPMorgan

David Bishop - FIG Partners

Operator

Good day, ladies and gentlemen, and welcome to the BankUnited 2018 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is now recorded.

I would now like to turn the conference over to Lisa Shim, Senior Vice President, Head of Corporate Development, Strategy and Marketing. Ma’am, you may begin.

Lisa Shim

Good morning and thank you for joining us today on our third 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.

Rajinder Singh

Thanks Lisa. Good morning, everyone. Thank you for joining us for our earnings call. We posted the earnings release this morning. You must have seen it. $0.90 a share, I think that was a few cents ahead of estimates. We are happy to put a strong quarter and earnings. This was comparable to $0.62 a share that people understood this time last year.

More importantly, we have been – for the last few quarters, we’ve been talking about our non-loss share earnings. Our non-loss share earnings this quarter came out at $0.64 compared to $0.50 at this time last year. Also that $0.64 compares to $0.59 that we posted just last quarter, which is 8.5% increase quarter-over-quarter. That's really as we've often called that the blue bar in the chart that we’ve now added to the earnings release that is sort of the ongoing earnings of the Company and that's what we are focused on building, and I have been reporting for the last few quarters.

Let me take a minute to talk about the market and then we will get a little deeper into BankUnited’s numbers. My update on the market is not going to be very different from last time, which is the economic front. Things are very favorable. It’s a very strong economy. There are no credit issues that we see in the markets and the products that we play in. And it's a good environment to be a bank and to be a lender in.

Business and consumer sentiment is very optimistic and very positive. There is some geopolitical concerns that we always have. We have the elections coming on in a few days. We obviously have some trade concerns. But overall, it doesn't feel that any of these things are a real issue, especially when we talk to our customers and we look at their financials as to how businesses are doing in our footprint. Things seem to be about as good as they can be.

Again, that can change very quickly, so we stay very, very focused on the economy something we don't control, but it impacts us immensely, but has good news on the economic front. On the rate front, again, the story is the same as last few quarters, which is that that has been raising rates. The long-term has not moved enough, while [indiscernible] some seasoning of the curve very recently, and when I say very recently, I mean literally over the last three weeks. For the most part, the curve has been flattening for a better part of the last year or year and a half, if not more, and that has an impact on bank earnings.

Deposit betas across the system seems to be now emerging. Even for the largest banks, those deposit betas as recently a three or six months ago were almost – were close to zero are suddenly now showing the emergence of those deposit betas. In a very progressed way, it actually feels good from a comparative perspective to see banks now beginning to catch up. We always said that betas will lag. Different banks deposit base will have a different kind of lag in their betas.

Our deposit base is heavily commercial and also organically generated, that's why our betas probably emerged a little bit sooner. But now we are seeing our competitors large and small catching up to it. This is my theory, of course. That deposit betas being low. Deposit costs, funding costs are being low for so long despite moving great had created a widening of margins that banks with low betas were then using aggressively on the lending side and pricing down spreads on the loans.

As banks deposits pricing goes up, it is my theory that deposit sort of wind flow was no longer be used to subsidize loans, and I'm hoping to see better spreads both in the securities world as well as the loan pricing over the course of next few quarters. We'll see if it comes out to be true or not.

There's a fair amount of competition outside of the bank space actually these days. This year really has been about non-bank lenders really competing. It's not the community banks across the street or the regional bank across the street that we’re concerned about.

It's actually we're seeing a lot of run-off in our loan book mostly coming out of the private equity world, credit funds, BDCs, and other non-bank players. So that has become a – that has been a big phenomenon this year. It was not the case so much the year before, the year before that.

Coming back to our numbers, like I said, it was a pretty decent quarter in terms of our earnings. NIM declined, Leslie will get into it. What are the various reasons for it? NIM declined to 3.51% from 3.60%. Non-covered loans grew by $211 million for the quarter, and for the year, were up about $708 million. Deposits also increased. They grew by $127 million, so less than what loans grew by, and our loan to deposit ratio is now at about 100%.

For the nine months, deposit grew by $427 million. The story here is as you will remember at the beginning of the year, we have said that growing DDA is the most critical thing for us for our short-term and long-term success, and we have not done a very good job of growing DDA in 2017. I think in all 2017, our demand deposits grew just by a little over $100 million.

I am happy to report that the mix of deposits that we've grown this year, 80% of that deposit growth has come in the interest rate DDA category. So $343 million off that $427 million, so about 80% is non-interest DDA. And non-interest DDA at the end of the day is the a) most profitable product that we sell, but to the core of every relationship that we have. If you don't have the DDA, you don't have the relationship award that I have been repeating over and over again and I will keep doing so until everyone gets it in the context.

And I'm very happy to report that while our deposit growth has been lower than what we wanted it to be, I'm glad that it is happening in the categories that generate the most earnings. A dollar worth of DDA has about five times the margin that a money market account – a dollar in the money market account does have today.

So I would love to have more interest-bearing deposit growth as well and we are working towards it. What I don't want to miss out is on the DDA growth, which is where one generates the most earnings and most franchise value. I think our DDA percentage of our total deposits has grown from 14% to 15.3% in the nine months of this year.

And as I look into fourth quarter, I see that trend continuing though deposits are notoriously hard to predict. So I don't want to say anything more than that other than that we're off to a pretty decent start this quarter better than what we’ve seen over the last two or three quarters, but we will see where we end the year.

Loan growth like I said, the headwinds and loan growth, when you see the net number and obviously it’s a number that is lighter than we had wanted it to be. We did a lot of analysis leading up to the earnings call as to where the weakness is coming from. And a number that we generally don't share, but I will throw out a number is on production.

Production for this year to get that $708 million of net loan growth, we've had production of $4.67 billion. So you have to produce that much to be able to grow $700 million. Last year, our production was about $50 million or $60 million less than what it has been in the nine months of this year, so just compared nine months of last year to nine months of this year, we're actually seeing more production, but the number in terms of net growth, there's a big difference.

This time last year, we were up to $1.3 billion and this year we're up only $700 million. The difference is payoffs and payoff is pretty much across the Board, whether it’s C&I, whether it’s CRE, and a lot of that happening because of private equity deals and M&A deals in the C&I space and asset sales on this commercial real estate side, and even refinancing, even this late in the game, when rates have risen as much as they have.

So that trend continues and we’re seeing that even in the fourth quarter. As rates rise even further, at least refinancings might slowdown, but there is a lot of non-bank funding out there chasing companies and there is a lot of activity. Also the health economy actually lends to it. The economy is good. People want to buy companies. People want to buy buildings, and that’s sort of the flipside of a good credit and good economic environment.

Growth outlook for the fourth quarter, like I said, third quarter, fourth quarter seem similar. You may see a little more deposit growth just based on what we’ve seen over the last two or three weeks of this quarter. But like I said, it’s notoriously hard to predict.

Cost of deposits, this quarter were up to a 135 basis points, so there is a 16 basis point move in cost of deposits this quarter. That’s about the same or maybe a basis point higher than what it was last quarter. But again, I will point to the fact that in an environment where most of our competition is seeing DDA run down. We are actually seeing strong DDA growth, and that is – and by the way it's not easy to do. That has been – that's a tough thing to do. We are swimming upstream, but we're succeeding and bringing on core DDA relationships.

On the deposit front, Leslie, shall I talk about this? Okay. I’ll walk through a little bit on deposits front. You will see that we've actually run down our money market and we've increased our CD book and that's a deliberate strategy. We're trying to lock in rates. We think going out on the curve a little bit and getting 12 and 18-month money is from a spread perspective is a better place to be than in money market.

That of course changes every day based on the competitive landscapes. But in third quarter and even in the second quarter, we were basically on using that as a strategy. We’re trying to lean heavily in deposits – on time deposits and less so on money market.

Now that obviously as the mix changes, the duration of our deposit book is lengthening. That's another factor into why deposit cost is going up over and above the fact that rates are moving up anyway. Also even in our money market book, on the commercial money market, we have deployed a strategy of locking in some rates for a period of certain time.

So money market generally is not a floating rate book, but about 10% of our money market like a $1.3 of it has been termed using deposit service agreements. So keep that in mind that the money market line item also has some term in it. It's something that we have deliberately worked on to protect us in a raising rate environment. So those two things, which are not very evident and we haven't talked about in the past, but there are importance points to note.

Tangible book value per share is at $28.88. It’s up from $23.83 last year. We did complete our $150 million share buyback program, which was authorized earlier in the year. And the Board just yesterday authorized another $150 million share repurchase program. I would suspect that the share repurchase will probably happen a little faster than the last one, which took about nine months to occur, given just what the stock price is.

Asset quality remains strong. Again, the only thing we talk about there is taxi, which by the way this quarter after many, many quarters actually feels like there is some stabilization there and Leslie will talk about that. But our NPL ratio is 96 basis points, 37 of that is directly attributable to taxi and our charge-off ratio is 21 basis points of that 9 worse accounted for about a taxi.

A quick update on the FDIC loss share. There is a reasonable possibility that – again pending consent from the FDIC, which we have not received yet. We are talking to them. We’ve been talking to them since October 1, and we continue to do. So we’re hoping to get something from them before the earnings call, but we have not. But we are trying to get consent to do a loan sale this quarter rather than wait till the middle of next year or second quarter of next year. And then also not sell all the loans, but to sell part of the loans.

Again, this is all up in the air. To the extent that 10 loans, let me say that these loans that if we do and the retaining will be loans with very high credit quality at least as good as the loans we have is not better in terms of LTV, in terms of FICO, and in terms of pay history, and also very importantly in terms of coupon. Most of these loans will be floating rate loans since they’ve been with us for 10 years.

So in terms of – again, before I give this over to Tom, I would say that fourth quarter again feels similar to third quarter maybe a little bit better, but it's hard to say. In terms of some new initiatives, we generally don't make a bit – a lot of [indiscernible] about this. We generally like to launch things that have some success before coming out and talking about them. But we did hire a healthcare team earlier this year. They've been with us a few months now, working on setting up a healthcare practice.

We have been a healthcare lender, but we've done this in a very broad-based manner out of our general corporate and industrial business line. But we started to focus on this earlier this year and created a healthcare vertical. And all the products, policies, the back office risk management is in place, and we expect to start growing that over the course of 2019.

So that's on the new business line front. Not entirely new because like I said, we did some of this, but not in a very organized vertical fashion, but we are going to do that and we have the right people on Board [indiscernible] a few months have been working with the risk management and we are ready to launch this now.

So with that, I will turn it over to Tom to talk about loans and deposits in a little more detail.

Thomas Cornish

Sure. Thank you very much, Raj. So just to provide a little bit more detail on the loan and lease portfolio for the quarter, if we break it down into the different components, residential and consumer loans grew by $115 million for the quarter, including $51 million of growth.

[Indiscernible] loans, C&I continued to perform well, grew by $151 million for the quarter driven primarily by the Florida corporate banking portfolio, mortgage warehouse business which is one of our newest businesses grew by $8 million for the quarter, and our total mortgage warehouse commitments for the quarter increased by $78 million, but we are now up to $1.2 billion in total commitments in that line of business.

In CRE and aggregate, we declined by $69 million. Consistent with previous quarters, we had $124 million decrease in the New York portfolio, primarily multifamily loans. This was offset by $55 million of growth in the Florida CRE portfolio.

Loans and leases and our commercial lending subsidiaries grew by $6 million and aggregate consisted of $60 million of growth at Bridge, which is divided into both our equipment finance company and our franchise finance company, which had a good quarter. That was offset by run-off of $54 million in our Pinnacle unit and that continues to be impacted by post-tax. Pricing pressure in that market is just not as attractive as it was previously as we've talked about in other calls.

Raj mentioned a bit of the elevated run-off in the portfolio and that's absolutely what we are seeing. But I would also emphasize that there are lines of business within the overall bank that are still generating healthy growth. For example, I mentioned the Florida corporate banking book has grown by 15% year-to-date, mortgage warehouse outstandings are up 17% year-to-date, the Bridge leasing and franchise finance business is up by 10%, and the business banking portfolio has grown by over 7% this year. So these are kind of all core C&I type business units that we've been stressing as part of the strategy shift mix in the portfolio.

And I think what’s illustrative of that is if you look at our new commercial production for the quarter, it came in an average coupon of 5.1%, about 63% of that was floating. We continue to try to improve the floating fixed ratio. And you can see that by looking at the portfolio as a total that average coupon is 4.3% with 43% floating compared to 63% floating of the new production for the quarter.

On the deposit side, continuing with the comments that Raj made about NIDDA, deposit growth for the quarter was driven by non-interest DDA growth, which accounted for $98 million of the $127 million in deposit growth. Interest-bearing demand deposits declined by $34 million for the quarter, while savings and money market deposits were down slightly, and time deposits grew by $66 million.

One example of good progress and growing DDA is the continued progress of our national deposit group, which grew non-interest DDA from 8.3% of their book, 12/31/2017 to 12.7% of their books since September 30, 2018. So that that we think an outstanding progress. And across the franchise and all the geographies in our teams, growth in core relationships, core checking accounts continues to be a primary strategic focus for everyone.

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

Leslie Lunak

Okay. Thanks, Tom. Digging into just a little bit more detail on some of the quarterly results around yields and the net interest margin; net interest income for the quarter was $252 million and $10.7 million increase over the comparable quarter of the prior year, and then the decline to $351 million from $362 million. The real drivers behind that in spite of increases in yields on all categories of interest earning assets we did see obviously an increase in the cost of interest-bearing liabilities.

The NIM was also not unexpectedly impacted this quarter by the continued run-off of high yield in covered loans, particularly with the larger than usual loan sale that we did this quarter. So this quarter was impacted a little bit more by that phenomenon and then some quarters have been.

We also continue to see relatively tight spreads on both loans and securities that we're putting on the balance sheet. The yield on both non-covered and covered loans as well as on securities increased this quarter. The yields are non-covered loans increased to 4.05% from 3.96% linked quarter and 3.79% for the comparable quarter of the prior year.

The tax equivalent yield on investment securities was 3.41% for the quarter compared to 3.33% for the immediately preceding quarter and 3.14% for the comparable quarter of the prior year. Those increases were influenced both by coupon rate increases on floaters and also some changes in portfolio composition. The portfolio duration and – importantly remains low at 1.48%.

The tax equivalent yields are non-covered loans in investments as well as the NIM when compared to comparable numbers for the prior year, which impacted by about 8 basis points due to the change in the tax rate, which had an impact of lowering each of those yields by about 8 basis points compared to the prior year.

Raj, I think it’s already addressed, deposit costs for the quarter. So I won't get into that any further. We also saw any increase in the cost of FHLB advances. Two things are going on there. Just general increases in rates, but we've also done some more hedging this quarter and extended the duration of that portfolio out we feel like per rates are today that's a favorable time to take advantage of that.

Reserves in the provision, the provision related to non-covered loans was $1.3 million for the quarter, compared to $37.6 million for the comparable quarter in the prior year, just to remind you last year, in the third quarter, the provision related to taxi medallion loans was $32.7 million compared to a net recovery of $1 million this quarter and the provision for Q3 of 2017 also included $5 million related the Hurricanes Irma and Harvey. So those two things really speak to the difference between the provisions for this does two quarters. Our ALLL Methodology hasn't changed. It remains consistent.

Quick update on the taxi portfolio, exposure is now down to $80.2 million from $87.2 million at June 30. That reduction was primarily due to paydowns, to get $6.3 million in paydowns this quarter. We're now facing our methodology for determining reserves on this portfolio primarily on recorded transfer prices. Since those transfer prices has started to converge with the results of the cash flow based template that we previously used. Those results are converging. So now we're relying primarily on the transfer prices.

We didn't change the valuations, underlying our reserves this quarter. They continue to range from $185,000 to $210,000, which is within the range of the recent record of transfer prices. Total delinquencies in the portfolio are $16.9 million, $13.4 million of that is over 90 days. That’s just a very slight uptick from the prior quarter end and the entire portfolio remains are non-accrual.

In terms of forward guidance, Raj spoke to what we're expecting to see in the way of loan and deposit growth for the fourth quarter, and we are – it has no changes to the other guidance that we put out there for the year either the NIM or the operating expense guidance and the aggregate that we've put out for the year. We are not changing.

With respect to the covered loans, future estimated accretion on ACI loans as of 9/30 is $284 million and future estimated amortization of the indemnification asset is $82 million. Both of those estimates are still predicated on the operating assumption that there will be a final sale of all of the covered loans in the second quarter of 2019.

Referring back to Raj’s comments about the possibility that we will retain a portion of high credit quality loans that exist within that portfolio and potentially be able to accelerate the timing of the sale of the rest of those loans to the fourth quarter of 2018. The impact of that from an accounting perspective would be that the amount and timing of the write-down of the indemnification asset would be accelerated into the fourth quarter.

What remained at the indemnification asset after receiving the reimbursement related to the final sale would be accelerated into the fourth quarter and a portion of the accretion, that portion related to any loans that we might retain would then be recognized over the expected lives of those loans. So over a longer period of time, we would also expect that the aggregate amount of accretion to be recognized will increase in part because of the collection of more contractual interest.

Unfortunately, I had hoped by today that we would have reached some kind of – had received some consent from the FDIC and I would have been able to quantify that for you, and unfortunately I'm not able to do that, but when and if we get that consent, we will update you and try to quantify some of that for you.

With that, I will turn this back over to Raj for closing remarks.

Rajinder Singh

Thanks Leslie. I actually provided a very important disclosure at the beginning of this call, which is that today, is Leslie’s birthday. The second half of the disclosure, which is how many candles are on the birthday cake later, will remain confidential.

Leslie Lunak

Thank you.

Rajinder Singh

But with that, I would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Ken Zerbe with Morgan Stanley. Your line is open.

Kenneth Zerbe

Great. Thanks, good morning.

Leslie Lunak

Good morning, Ken.

Kenneth Zerbe

I guess maybe if we could just start off just in terms of the acceleration of the FDIC loan sales, can you just talk about the rationale for why you would choose to do that versus keeping them on for another couple quarters?

Rajinder Singh

As we have said in the past that loss share will have some expenses associated with it. And there is – there are things that the obligation that we have with FDIC in terms of administering loss share, which is a burden for the FDIC and it is a burden for us. If we can save six months worth of that burden of that administrative hassle, that's better for us.

Also the value of FDIC in loss share is important to the extent you expect loans to go back. And obviously an option is always what something, but when the loan portfolio that's left is, is so clean that you don't expect much losses. The value of that insurance is not worth as much versus the benefit that you might get by rapid things up a little sooner.

Kenneth Zerbe

Got it. Understood. And you able to quantify the amount of expense savings that you should be able to get once these loans are off the books?

Rajinder Singh

I will say that whatever there is, it's not going to be obviously this year. It will all be in 2019, and it’ll not be immediately in the first quarter of 2019 or anything like that. It will take a little bit of time. We will quantify that for you in January when we give you guidance for 2019. We are working on that and we will give you numbers – the specific numbers in 2019 in January.

Kenneth Zerbe

Gotcha, okay. And then just one last question. Just in terms of the loan growth, if I heard right, I think you said loan growth for fourth quarter is going to be around the same $200 million as it was in 3Q. When we think about 2019, [indiscernible] give guidance. But when we think about 2019 assuming that, I mean should we assume, right that the non-banks remain just as competitive as they are now, and is it fair to take – save the $200 million 4x when we think about 2019 loan growth? Thanks.

Rajinder Singh

Our loan growth year-to-date has been about $700 million – a little over $700 million. We are not ready to give you guidance on 2019. I will say this much that the competitive landscape will probably remain the same.

But as rates start to rise, at some point of time, refi basically ends. There’s some refi activity that is still happening. Somebody may have a loan [indiscernible] five years ago, four years ago at 3.25%, and now if they can do it even if it's close to 4% they want to lock it in for another five years. That rate has now moved to 4.5%, and suddenly that opportunity starts to go away.

So as rates keep climbing, especially the long end of the middle of the carve starts to rise, that will drive sales out. And also, like I said at the beginning of my remarks, as I see deposit betas for even the largest banks of DFAs and Chase of the world also start to get real.

I think that low funding cost advantages they had over us for the last year or so will start to dissipate, and they've been using that as a weapon on the lending side, and I think you will start to see some of that go away. That doesn’t takeaway the non-bank lenders. Non-bank lenders still look very much active. Life insurance companies will still remain very much active.

So it's hard for me to give you what the run-off number will be next year. In terms of our production, I think our production will be very similar. The only place where we feel production is light, it's Pinnacle, which was a very steady grower for us about $200 million, $250 million a year of growth, and now it's shrinking for the last several quarters, last three or four quarters.

And that could turnaround, but it doesn't look like it has yet. So that is a – I'm a little pessimistic about where that business is. And New York CRE, which we've been running down for the last two, two and a half years now. Other than that everything else is growing and sales are notoriously hard to predict. Even for fourth quarter, we sit here and we do the math almost on a weekly basis and the numbers move around a lot.

Kenneth Zerbe

Gotcha, understood. Okay. Thank you very much.

Rajinder Singh

Production should be similar to a little bit higher given some of the new initiatives we have in place, $4.6 billion to $4.7 billion for nine months. That's a lot of production and very steady production from last year to this year and will be steady again next year. As long as the economy is still doing well, we'll keep producing at that level, and probably a little bit higher than that, but run-off it's much harder to predict.

Kenneth Zerbe

All right. Understood. Thank you.

Operator

Thank you. Our next question comes from Brady Gailey with KBW. Your line is open.

Rajinder Singh

Hi, Brady.

Brady Gailey

Hi. Good morning, guys.

Rajinder Singh

Good morning.

Brady Gailey

Just one more on the loan growth question, so Raj I know loan growth expectations have kind of come down over the years. Last time, you talked about high single-digit loan growth. It doesn't sound like that is possible any time in the near-term like, obviously not in 4Q, as you look out to 2019 that feels like it's going to be less than that right?

Rajinder Singh

Again, I don't want to talk about 2019, because I'm not giving you guidance on 2019. But for 2018, obviously that number will be lighter than what we had expected even three months ago, yes.

Brady Gailey

Okay. And then it’s great to see you’ll get a little more active on the buyback front, you got the new plan out there, and I mean the stocks basically trade in the tangible book value, so I’d expect you all be fairly active on that front. But beyond the new buyback, maybe just talk about your interest in buybacks from a bigger picture point of view. If you all complete this buyback fairly quickly, I mean that will take capital ratios down. How much lower would you be willing to take the TCE ratio?

Rajinder Singh

Leslie, you want to talk about it?

Leslie Lunak

Yes. Generally, Brady our TCE ratio, you’re correct in realizing that. That's a constraining ratio. And we tend to think about 8% of the level that we would be unlikely to go below. At that point, I think you started to raise semi growth.

Brady Gailey

But you still have a lot of room from here to there.

Rajinder Singh

The $150 million that we just did. Our board wants to do this in increment. So we did $150 million, they are giving us another $150 million. Like I said, this will probably go a little bit faster given where the stock price is at and no-brainer to step in with the legal limits obviously and buy stock here and we will start in two days once our blackout is over. But the philosophy on buybacks is hasn't changed, right. This company used to have one lever for earnings growth, right. It used to be loan growth. That was for the longest time, the story of BankUnited.

Over the last two years, it has been a more Nuance story, it is about loan growth, but in the right categories, right. So changing the mix of that balance sheet both on the loan side and on the deposit side that is what is driving not just total growth. Obviously there is Capital Management on top of that, which you've seen as execute already and we were about to execute again and we will do even more so in the future if it warrants it. And getting in 2019, it will also be expense control.

Brady Gailey

And then lastly for me, just on NPAs, they've picked up a little bit and it really kind of CapEx the level that you all saw at the end of Q1 2018. But if you just look bigger picture, I mean NPAs are running around 1% of loans plus OREO, which is a little high compared to peers and maybe I’ve just forget, but is there any reason that your NPA ratio would be a little above the peer average share 1%.

Leslie Lunak

Yes, the taxi medallion portfolio.

Brady Gailey

Got it. Yes.

Rajinder Singh

If you take that out and then…

Leslie Lunak

If you take that out is pretty favorable and the uptick is nothing, I recognize the uptick this quarter as nothing we see the systemic is only to these augments type things that top-up from time-to-time, but nothing we’re seeing the systemic.

Rajinder Singh

We got a taxi portfolio is our non-performing. So these are non-accrual, so even the loans that are performing are non-accrual.

Brady Gailey

Got it. That makes sense. Thanks for the color, and happy birthday Leslie.

Leslie Lunak

Thank you.

Operator

Thank you. Our next question comes from Stephen Scouten with Sandler O'Neill. Your line is open.

Stephen Scouten

Hey, guys. Good morning.

Rajinder Singh

Good morning.

Stephen Scouten

I'm curious, I know Raj, you said no specific guidance around 2019 in general or the reduction in expenses that could come from getting past the loss share, but expenses were a little elevated, it look like on some professional fees and other non-interest expense? Was there anything kind of one-time in nature that I might have missed or how are you thinking about maybe 2018 expense growth I guess year-over-year now?

Rajinder Singh

Yeah, the professional expenses that you see that are a little higher. Part of it is related. Part of it is – we have a specific technology project that is going on we’ll review some external components and that will be over in a few months. But also we have engaged consulting firm only about –that's actually not even in the numbers, which is only by recently, which is to help us things through LIFO loss share and you will see those expenses elevated for a couple of quarters, but eventually that is to help us think through what the operating environment should be for BankUnited as we get past loss share.

Stephen Scouten

Gotcha.

Rajinder Singh

That is we will see things that they’re talking about, yes.

Stephen Scouten

And so for the full-year, in terms of expense growth extra that amortization, we’re still talking high single-digits there will be material different from that?

Leslie Lunak

I think the guidance we put out there would mid single-digits.

Stephen Scouten

Okay.

Leslie Lunak

Yes, [that’s what we lead]

Stephen Scouten

Gotcha. Perfect. Okay. And then Leslie, I'm not sure if I missed this. But did you going to give updated guidance somewhere you think the NIM will go and maybe as I dig into that, can you give some further granularity on the comment in the release where you talk about new yields kind of coming on lower than existing yields and it will – we see some continued pressure on not only the funding side, but also on the asset yield side?

Leslie Lunak

So – okay, let me try to attack that. There was a lot of question. So first of all, the comment about a new assets coming out of lowering than existing yields. That’s totally about the run-off of the covered loans. The new loans we’re bringing on or coming on a higher than the existing yields on the non-covered portfolio, but they're coming on a lower yields than we aggregate yield on loans because of the impact of covered loans. So that's what that comment is about that since…

Stephen Scouten

Makes sense, yes.

Leslie Lunak

The run-off of the covered loans is head with downward impact on the NIM and it will continue until we execute that final sale. So that's what that's about – what else did you ask, I’m sorry…?

Stephen Scouten

I guess just – yes, just overall direction of the NIM – sorry overall direction of the NIM if there's continued kind of core margin pressure here X the accretion?

Leslie Lunak

Those talking about my birthday that I can only keep one question in my mind at a time. The guidance about the NIM for the year has not changed. We set between 3.50% and 3.60% all-in for the year that closer to the higher end of that range and I think that's still where we will be for the year in the aggregate. But that does include the accretion on the covered loans.

Stephen Scouten

And in that assumption are you assuming that that loans still gets completed and that's particularly elevated in 4Q the accretion above the kind of $80 million-ish run rate we’ve seen?

Leslie Lunak

Either way I think we'll still be in that 3.50% to 3.60% range on the NIM for the year.

Stephen Scouten

Okay, great. Thank you guys for the color. I appreciate it.

Rajinder Singh

Thanks.

Operator

Thank you. Our next question comes from Jared Shaw with Wells Fargo Securities. Your line is open.

Jared Shaw

Hi, good morning.

Rajinder Singh

Hey Jared.

Leslie Lunak

Good morning, Jared.

Jared Shaw

I guess just first, could you update us on what the remaining New York City multifamily balance is that that's in runoff?

Leslie Lunak

I’ll get that. Yes, give me just a minute and I’ll get that. How much New York City multifamily was?

Rajinder Singh

Multifamily, I’m sorry…

Jared Shaw

Yes.

Leslie Lunak

Give me just one second, I’ve got the numbers.

Jared Shaw

Okay. And then I guess while you're looking at that…?

Leslie Lunak

Total New York multifamily at September 30 is $2.2 million.

Rajinder Singh

$2.2 million.

Jared Shaw

Okay. Thanks.

Leslie Lunak

But don’t assume that we intend to run that down to zero. That’s not the plan. So…

Jared Shaw

Okay. And then when you look at the loss share agreement, the covered loans and the loans you would consider keeping, I guess that those loans would be the same whether you get earlier approval on a sale or not. But when you look at that that total unpaid principal balance, how big of a portion of that do you think could be loans that you'd be interested in keeping? And then when you look at those loans, what are some of the dynamics around average life and the coupon on those loans?

Rajinder Singh

I will not be able to give you the number because we’re negotiating that with the FDIC as we speak. But when we have deal, we will file an 8-K and will give you as much detail as you would want. I will say the following about the characteristics of the loans that we were sort of ring fencing. They all have to be performing.

The LTVs are going to be lower, significantly lower than the LTVs of the loans that we already have. And FICO scores are going to be in the high 700, so 750 and over. And because this portfolio is an aged portfolio, so it was originated at least 10 years ago. A large part of this portfolio is going to be floating rate. Okay, in that regard it will be floating rate portfolio with the coupon, which is actually north of where coupons are right now.

Jared Shaw

Okay, great. That’s good color. Thanks. And then when you look at the – you spoke about terming out some of the money market deposits to extend the duration there, how long of a term are you able to get on that money market side? And then when you combine it with the CDs, how much of a duration extension are you looking for in the funding liabilities? Are we talking fairly modest or are you looking to do…?

Rajinder Singh

So that portfolio – that portfolio that part of the money market that is extended out – is extended out around a little over two years.

Jared Shaw

Okay. That’s about $1 billion of the $10 billion?

Rajinder Singh

Yes, roughly, a little more than $1 billion, yes.

Jared Shaw

And do you think that balance that's termed out could continue to grow or are you happy with where it is there?

Rajinder Singh

It depends on how much demand there is for that particular product. We've had the demand earlier this year. Also depends on the slope of the curve, the flatter the curve is the more that products you can do, but I don't expect it to grow too much. But there are still a few clients we're talking to about that, so there maybe marginal growth over there. There's a very unique kind of clients that wants to lock in rates, so you get duration and they get slightly higher rate and it works out. But if the curve starts to steepened then the opportunities that goes [delinquently].

Jared Shaw

Great. Thank you.

Operator

Thank you. Our next question comes from Lana Chan with BMO Capital Markets. Your line is open.

Lana Chan

Hi, good morning.

Rajinder Singh

Good morning, Lana.

Leslie Lunak

Good morning, Lana.

Lana Chan

I just wanted to clarify the expense growth or the associated savings with the FDIC loss share going away. I mean if you do retain some of those loans, does that impact the expense reduction that we're expecting to see from the FDIC loss share going away?

Rajinder Singh

No, we already have multibillion dollar book of residential loans, so adding a little bit to that, it doesn't really require anything more than what we would need with our current portfolio. So it's the administrative burden of running loss share that will go away and that's where the savings will be.

Lana Chan

Okay. And then secondly around the hiring of the consulting firm, looking at life beyond the FDIC loss share, are they looking at additional opportunities to potentially cut costs outside of the FDIC loss share going away?

Rajinder Singh

It’s a well-known strategy consulting firm and they're looking at everything supping up.

Lana Chan

Okay. Just one more if I could, in terms of – I think you had recently hired a new. Commercial Real Estate manager in New York City and you've been obviously pulling back from multifamily in New York for some time now. Could you talk about the strategy there now with the new hire on the CRE side?

Rajinder Singh

Yes. So Ben has been with us two months, Tom?

Thomas Cornish

Yes. About month and a half.

Rajinder Singh

Right. And we are really right now sitting down and spending time with them about what the production strategy will be for 2019, and how we're going to diversify away from multifamily. 75% of our portfolio or something like that is really multifamily, and to broaden the scope is really why we brought Ben in. Ben is a more general CRE producer and a team lead and our plan is to not be focused only on multifamily.

Multifamily will be an important part of it, but to actually sort of venture beyond multifamily into other aspects of commercial real estate. We've done that to some extent, but we've done it with the existing team, which really was a multifamily team. So with this change in leadership with Ben's years and years of experience in areas beyond multifamily, we have high hopes that next year you will see a higher level of production out of New York or the north multifamily – CRE business then you have this year or last year.

So give him a little time. He has been here for about two months. We will see some better numbers in the fourth quarter, but I am really looking forward to 2019, and I hope he is on the phone.

Thomas Cornish

I would add on non-multifamily book in New York is about $1.5 billion and it spread among various asset classes. And over the last couple of years, we’ve better balanced this as we've run down both the multifamily side and run the non-multifamily side. So an acceleration of that strategy is what we'll be looking to see in 2019 and beyond.

Rajinder Singh

Yes. And multifamily coupons, which is the question I always get, we haven't gotten it, so I’ll talk about it anyway. We are seeing somewhat better coupons then we have for the longest time. So multifamily coupons in five-year paper are now in the mid-4s, sometimes a little bit better than mid-4, sometimes a little worse. But for the longest time they were stuck in the high-3s and around 4%. So that's a good sign.

What we don't like is structure when people are doing 10-year IOs or 7-year IOs. That’s not a pricing issue, that’s a credit issue. 10 years is a long time. Cap rates are very, very low and interest rates are rising. And that makes us a little nervous on putting on very long dated IOs, but the pricing in the 4.5 in three quarters is actually not as bad as it was even three or four months ago.

Thomas Cornish

Also asset sales in that category remain down, so even if you get into longer-term loans, you're likely to – your average weighted life of the loan is going to likely to be more extended than it was a couple of years ago. So when you make those decisions, you tend to be at it for longer.

Lana Chan

Okay. Great. Thank you very much.

Operator

Thank you. Our next question comes from Steven Alexopoulos with JPMorgan. Your line is open.

Steven Alexopoulos

Hey. Good morning, everybody.

Rajinder Singh

Good morning.

Leslie Lunak

Steven, good morning.

Thomas Cornish

Good morning.

Steven Alexopoulos

And happy birthday, Leslie.

Leslie Lunak

Thank you.

Steven Alexopoulos

I wanted to start – first to follow-up on the cost saves, which I know you've been asked on a few times on the loss share getting results. Raj given that you're still not in a position to share the cost saves, I would think that's fairly straightforward right? You have certain number of people working on the asset that you won't need, what else is in that equation that you can't share it yet?

Rajinder Singh

The reason we've stayed away Steven from talking about cost saves is, it impact people. Okay. And until we are ready to talk to people about it, I don't want to talk about it on the call.

Steven Alexopoulos

Okay. That’s fair. To shift gears Raj, so you guys obviously a good growth in the non-interest bearing, everybody is obviously trying to grow that here? Can you talk about why you're able to grow that business we had nice growth in the quarter? What are you doing to win here?

Rajinder Singh

Those are big, big push at the beginning of this year and a change of messaging inside the Company. I think there is in the meeting that I go in or any loan to pre-approve or anything that we do without the question coming up, 10 times a day, where is the DDA. We’re doing this. We're signing of this vendor where is the DDA from that vendor.

We’re signing up this during this loan lighting to get the DDA. So if we change incentive plans to favor DDA in a big way across the Board and by the way to DDA growth is coming across the Board. So it's not like one business line showing – got in some big DDA. It's fairly spread out and I think the message is getting out. It's not easy Stephen. This is really swinging upstream.

I know what effort it took to actually get in that that DDA, and the battle is not one. This is just at the beginning and we have a lot of work to do in terms of growing DDA, but if we can keep that that you're increasing – not just earnings increasing franchise value of the company.

Stephen Scouten

Okay.

Thomas Cornish

And a processor, which in treasury management revenue, which were saying nice increases and because these are operating accounts for your selling treasury product and you're making the relationship sticker to the bank.

Rajinder Singh

Yes, it's coming from small business, it’s coming from that our business banking unit, it's coming from large corporate even then national deposit team that’s Tom had mentioned in his talking points that action deposit that sort of the biggest ticket size business and when we sat down with them, the CRE said okay.

You’re goal is not to grow, just volume but we want you to move the needle on demand deposits and we tied there instead of two achieving those goals, I'm very happy with the fact that in just nine months, we've turned that around so much.

The average ticket of that business has gone down dramatically because you don't win $100 million DDA that's not how the DDA business works. So the DDA business works to bring in $1 million or $2 million or $0.5 million at a time. On the commercial side, the consumer is very, very small and it takes a lot to get just that, so that business has gone from chasing really big accounts to really, really small accounts. Average ticket size is $1 million or $2 million. And you do enough of that and it actually moves the needle.

Stephen Scouten

Okay. Thanks Raj. Just one final one, following up on the large loan payoff you're seeing, can you give some color on which businesses you're actually seeing the largest payoffs here? Thanks.

Thomas Cornish

Yes. I would say it's in both the large C&I corporate business and in the CRE book of business, now in both markets. And as Raj said, it's a bit episodic. You see asset sales, you see private equity buyouts, you see asset securitizations, real estate projects moving to the CMBS and LIFCO market, but it's predominantly in those two businesses where we see – in both markets where we see the largest payoff levels.

Stephen Scouten

Okay, great. Thanks for all the color.

Operator

Thank you. Our next question comes from David Bishop with FIG Partners. Your line is open.

David Bishop

Hey. Good morning, guys.

Rajinder Singh

Good morning.

Leslie Lunak

Good morning, Dave.

David Bishop

Leslie, question for you, and I know it's sort of an accounting thinking question. The net loss on the IOs turns negative to positive, remind me the accounting drivers or what’s driving that? Is that a – I know that’s an approaching expiration, but is that that stay positive moving forward?

Leslie Lunak

So that is really a thinking question. You’re right. And you can call me and we can dig into it a little bit further if you want to. But essentially a couple of things happened. We had [indiscernible], as a result of that sale, the carrying value of one of those pools went to zero and we had some release of accretable discount associated with that.

And since that [indiscernible], we deal with expected loss and then have an offsetting indemnification impact. So that was a release for that accretable discount. And if you really want to dig into that more, give me a call and we can…

David Bishop

Okay. I’ll take you up on that. And then Raj, you talked about the launch of the healthcare group. Obviously, it will take some time to get going. Is that national in scope and maybe – just maybe size in terms of outstanding, should we think of that with [indiscernible] over time, just maybe a thought as you head into 2019, can they start impacting the loans outstanding in 2019?

Thomas Cornish

Okay. So the business was regional. It is not national. It will be focused on New York and Florida. Both of these economies have – healthcare has probably 20% of the GDP of these economies. So there is a big opportunity here. It is not just a lending business. It’s a lending and deposit business.

And like I said, we have certain products that we've worked on this year, especially in the treasury management side, which we now intend to go out and sell. In terms of defining what the opportunity is, it's not in billions of dollars in the short-term, does not the national deposit group. It will be a measured in hundreds of millions over the course of the next couple of years.

David Bishop

Got it. And another sort of easier or housekeeping question for you Leslie. The tax rate looks like it tick down this quarter and we think driving now is that a good run rate into the quarter in 2000 – I guess how should we thing about 2019 on the overall tax rate?

Leslie Lunak

That will probably revert back to where it’s been in more recent quarter, Dave and it’s really and effective some return to provision adjustments, we file to return so.

David Bishop

Got it. Thank you.

End of Q&A

Operator

Thank you. And I am currently showing no further questions at this time. I would like to turn the call back over to Raj Singh for closing remarks.

Rajinder Singh

Once again, thank you so much for joining us for our earnings call. We will talk to you again in 90 days. Thank you. Bye.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.