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BankUnited (NYSE:BKU)
Q2 2019 Earnings Call
Jul 24, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to the second-quarter 2019 BankUnited, Inc. earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Ms.

Susan Greenfield, corporate secretary. Ma'am, you may begin.

Susan Greenfield -- Corporate Secretary

Thank you, Brian. Good morning, and thank you for joining us today on our second-quarter 2019 earnings conference call. On the call this morning are Raj Singh, our chairman, president, and CEO; Leslie Lunak, our chief financial officer; and Tom Cornish, our chief operating officer. Before we start, I'd like to remind everyone that this call contains forward-looking statements within the meaning of the U.S.

securities laws. Forward-looking statements are subject to risks, uncertainties, and assumptions, and actual results may vary materially from those indicated in these statements. Additional information concerning factors that could cause actual results to differ materially from those indicated by the forward-looking statements can be found in our earnings release and our SEC filings. We do not undertake any obligation to update or revise any such forward-looking statements now or at any time in the future.

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

Raj Singh -- Chairman, President, and Chief Executive Officer

Thank you, Susan. Welcome, everyone, to our earnings call. A special thank you for everyone for joining. We know we have strong competition for your attention today with Robert Muller going on about at the same time as we are.

So for all those who have dialed in and want to hear our story, thank you so much. Let me start by saying this was a very strong quarter for us. We printed $81.5 million net income, $0.81 a share. This is up from $0.65 last quarter.

The second quarter of 2018, which feels like a long time ago, was $0.82 a share. But the nonloss share earnings last year in the second quarter were $0.59 a share. So from $0.59 last year or $0.65 last quarter, $0.81 is hell of a performance. Actually, what is even more interesting is that our total EPS, including loss year last year was $0.82.

Today, we have no loss year and we're at $0.81. In a very, very short period of time, loss share expired just six months ago. So overall, I'm very happy with the profitability metrics that we've posted. I think we are at 10% return on equity and a little over, I think, the 91 basis points or so of ROA, which is a very healthy trend over the last two or three quarters.

In terms of growth, let's talk about deposits first, then we'll go to loans. Deposits grew $243 million, total deposits. But DDA grew more than that. DDA grew $335 million, which just to look reflective.

All of last year, our DDA growth was $550 million, which I think most of you would agree, was a very strong year for us. Now we had $335 million of growth in one quarter, which is -- makes me very happy. I will pause here for a minute and say what I've been saying on, I think, over the last five or six calls is do not look at any quarterly number and annualize it. Always look at the trailing 12 months numbers when you think about growth.

So just before this call, we quickly did the math. I think over the last 12 months, if you see our total deposit growth was about $1.74 billion of which DDA was $784 million and loan growth was about $1.178 billion. So that is more reflective of where the franchise is. Every quarter, there can be ups and downs on the growth numbers.

But nevertheless, going back, this was a very solid quarter. We'll take $335 million of DDA growth any day. The cost of deposits inched up by 3 basis points. So we are finally seeing that curve inflect.

Last quarter, I think our cost of funds had gone up 17 basis points. This quarter, it was only three. And with the impending influx next quarter, we expect cost of funds to decline. Competition for deposits remained strong in all our markets.

But obviously, I can say at this inflection point that we're expecting some shakedown and some reversal in deposit pricing. Loans grew $420 million. That's before taking into account $189 million of loans that we moved from held-for-sale to -- move from held-for-investment to held-for-sale. These loans are our municipal loans or Pinnacle loans.

To remind everyone, these loans were originated prior to the tax law change that went into effect a few quarters ago. So they were originated in a higher-tax environment, and hence, the profitability of these loans in the new tax environment is much lower. So we've been looking for a way to pare back some of this, and we're in the middle of trying to get this transaction closed and I expect this to not have any impact on earnings. This -- these loans will clear for above par.

The current outlook for loan growth and deposit growth. For the rest of the year, we'll stick with our guidance that we gave you at the beginning of the year -- or, I'm sorry, back in April. We are still looking for the same kind of loan growth and deposit growth that we talked to you about. NIM guidance that we gave of 2.50% to 2.60%.

By the way, this quarter, we came out at 2.52%, which was down 2 basis points from 2.54% last quarter. For the year, I think NIM will be under a little bit of pressure. So we will probably instead of ending in the 2.50s, we might end up just a tad below, maybe in the 2.40%, but that's sort of -- and inverted yield curve does not help NIM as you all are aware of. Nonperforming loans and credit metrics are pretty consistent.

Over the last couple of quarters, annualized charge-off remained very low at about 5 basis points, and Leslie can talk more about that when we pass the microphone to her. Share buyback. We continue to buy back shares through the quarter. And actually subsequent to the quarter end, we completed our $150 million share purchase.

Though at the end of the quarter, we still had a little bit left. But in the last two or three weeks, under our 10b5-1 plan, we continue to buy back and that authorization has been fully executed. Before I pass this on to Tom, I just want to talk a little bit about the environment. The macro environment, again, it's a story -- it's sort of a -- when we look at our portfolio, when we look at what our -- how our clients are doing, it looks like a very strong economy, and we don't see any concerns.

However, when we look at capital markets and we look at the shape of the curve and the warning signs coming from our Bloomberg terminals, obviously, give us pause. So we are -- from a stance perspective, we are in a place where we are not leading into more risk. We have been defensive for now, I would say, about three quarters, and we'll continue to be so. So with that, I will turn this over to Tom, who will talk a little bit about the business in more detail and also give you an update on BankUnited 2.0.

Tom Cornish -- Chief Operating Officer

Great. Thanks, Raj. So we're happy to pass along our progress so far on BankUnited 2.0. It's -- we've been vigorously executing all of our strategies and initiatives over the last few months, and we feel like we're in excellent shape.

So, as far as our financial targets, we think we are on track to meet those financial targets, which were an incremental annual pre-tax impact by mid-'21 of $40 million on cost savings and overall $20 million on revenue lift. So, we feel like we're starting to see the impact of that already, and we feel very positive about where we are. Just a couple of comments on some of the major initiatives and components of BankUnited 2.0. As it relates to the driving of operational excellence, we have now completed, in the last quarter, the reorganization, realignment, of all of our commercial and small business operating entities and their support credit functions that go with them.

We've begun implementation of the reengineered operational process in back-office departmental structure to increase efficiencies, and we've initiated the rollout of our robotic process automation. So all of those are exciting initiatives to help us drive operational excellence throughout the company. In the area of revenue enhancements, we have hired the director of the commercial card program and started to build out the team and the technology to support a 2020 launch of our commercial card and P-Card programs. We've implemented new treasury management fee structures, realigned sales efforts to increase -- and we're seeing very significant increases in product penetration with our existing client base, which we are very excited about.

We went live with our new credit center for midsized loans, and we've decreased our cycle time from 28 days to seven days, which is obviously a dramatic improvement in both our efficiency and client experience that happens from that. Our target is five days, so we're narrowing in on that. So that'll be a very significant improvement for us. We've continued to execute our branch optimization strategy.

We've opened up a new branch in Winter Park. We have long sought a location in the Winter Park area of Orlando, which is a terrific market to be in. So we opened that up this last quarter, and we're continuing to enhance our presence in that market. And we also established our data analytics center of excellence for the company.

So, that's a big, new initiative for us in the entire data management process. So overall, 2.0 continues to be executed and implemented with vigor and enthusiasm, and we're very excited about the progress that we've made so far. So, to pivot a little bit and go into loan and deposit growth. I just started out on the loan side by saying, overall, it was an excellent quarter in production for us.

On all of our commercial businesses, we had about $1.5 billion in production for the quarter, which met our overall goals, we're happy with that, with a weighted average yield of 4.7%. So if we look at the individual components a little bit more, residential loans grew by $222 million for the quarter. Multifamily loans declined by $153 million, and this is kind of consistent with our strategy of continuing to pare down our exposure in the multifamily space, particularly in the New York market. That $153 million decline was offset by other categories of growth in CRE, principally office and industrial, which ended up leaving CRE basically flat for the quarter.

Overall, C&I loans grew by $34 million within our corporate banking and commercial banking segments. For our national businesses, it was a strong quarter for the mortgage warehouse business. That grew by $70 million. Our Bridge leasing and franchise business had an excellent quarter, $80 million of growth across both the franchise and equipment lending divisions.

So overall, we saw a nice balance across the portfolio, and I think a reasonable growth and an excellent production level. On the deposit side, as Raj said, that continues to be a good story for us. Strong noninterest DDA growth of $335 million. That was offset by a decline of $476 million in the savings and money market categories.

Interest-bearing DDA grew by $70 million and time deposits increased by $314 million. But I think the overall strategy continues to be to work very hard at increasing to all of our noninterest DDA accounts across the company, better treasury management product penetration, and continuing this effort to significantly increase our percentage of -- noninterest DDA as a percentage of our overall deposits. So that's kind of a summary of the deposits. And with that, I'll turn it over to Leslie.

Leslie Lunak -- Chief Financial Officer

Thanks, Tom. So, as Raj said, good quarter from an earnings perspective. Net interest income was flat to the prior quarter but as expected, declined by about $64 million from the second quarter of the prior year. All of that as a result of the covered loans sale that took place at the end of the year last year and the reduction in accretion on those loans.

The NIM decreased to 2.52% this quarter from 2.54% the prior quarter, and down from 3.60% for the second quarter of 2018, again reflecting the covered loan sale in late 2018. The yield on noncovered loans was 4.52% this quarter, up from 3.96% for the second quarter of the prior year, and an increase from the immediately preceding quarter when it was 4.50%, so a couple of basis points up from there. Yield on the investment portfolio, up to 3.61% this quarter from 3.33% for the comparable quarter of 2018, down 3 basis points linked quarter mainly due to coupon recess. Duration of the portfolio remained very low.

As Raj mentioned, we do expect NIM compression over the next two quarters. Our forecast has three assumed rate cuts by the Fed baked in for the rest of 2019. So predicated on those assumptions, we do expect some NIM compression over the next two quarters as our assets reprice down before our liabilities. Reserves and provision, I think you've all noticed that the provision for loan losses was a credit this quarter.

We have a net release of reserves and that was driven primarily by releases of specific reserves on a couple of particular credits. We have one large payoff in one situation where we were able to favorably restructure a loan that led to the release of some of those reserves. Expense guidance. Noninterest expense for the second quarter included $5.2 million of cost specifically related to BankUnited 2.0, primarily professional fees, also some severance and branch closure-related costs.

For the six months, these costs totaled $12.1 million. For the full-year 2019 compared to 2018, I would expect total operating expense to be flat to slightly down. That's inclusive of the BankUnited 2.0 cost and, excluding for the prior year, the indemnification asset amortization. If I exclude the onetime costs such as professional fees related to BankUnited 2.0, I would expect that to be down 3% to 4%.

And with that, I will turn it over to Raj for any closing remarks before we open up for questions.

Raj Singh -- Chairman, President, and Chief Executive Officer

Sure. I mean the only thing we didn't talked about is that the pipelines, both on the loan side and deposit side, remain strong. Like I said in the past, loan pipelines are generally much more easy to predict and deliver on. Deposit pipelines can be harder to predict.

But I do measure success sort of based on what new accounts are coming in. There's a lot of movement in the existing books just because they're living, breathing book. But as long as we are bringing in new clients and opening new accounts, that's really, in my mind, the indicator for how well the bank is doing. And on that front, the pipeline of new business, people who've never been in BankUnited and are about to get here, that is very healthy and robust.

So, we feel pretty good about the rest of the year. And with that, we will turn it over for -- to you guys for questions.

Questions & Answers:


Operator

[Operator instructions] And our first question will come from Ken Zerbe with Morgan Stanley. Your line is now open.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. Good morning. I guess, maybe just starting of, in terms of the CRE growth or the flatness, I suppose, obviously, I heard you guys say that multifamily was down, but it was offset by office and industrial.

Is any of that coming from New York in terms of the CRE growth? Or is that declining in New York and then growth in other non-New York CRE?

Tom Cornish -- Chief Operating Officer

No, it would be both. It would be both. We had a particularly good production quarter in New York, and office and industrial loans in Florida had a good production quarter as well.

Ken Zerbe -- Morgan Stanley -- Analyst

OK. And are you at the point where you believe New York could actually stabilize given some of these trends?

Tom Cornish -- Chief Operating Officer

It's stabilizing. The rate have come down. It's a bit lower than it has been in the past. We're also looking more intensely at some of the rent regulation issues that are going on.

So that's been a significant change in sort of the market dynamics of the multifamily. So, to the extent that there's activity in that space, that's activity we're watching closely, but definitely the pace of the decline continues to slow down, if you will. And we think over some reasonable period of time that we will start to get another asset categories enough growth in the market to where -- we'll start to see some growth in the New York market.

Ken Zerbe -- Morgan Stanley -- Analyst

OK. And in terms of the loans, the held-for-sale loans from Pinnacle, are you -- does that complete your, I guess, sort of basket of loans that you want to sell? Or are there potentially additional loans that could be moved out for sale?

Raj Singh -- Chairman, President, and Chief Executive Officer

We are looking at loans that were originated prior to 2017, and that portfolio is fairly large. But we will be opportunistic about it. There is no plans right now to do more sales, but if the opportunity comes along and -- we will act on it. But right now, this is all we are planning and then we'll be, like I said, opportunistic.

Ken Zerbe -- Morgan Stanley -- Analyst

OK. Great. And then just one last question, if I could. Do you have any additional appetite for share repurchases from here? I think I heard your authorization was basically over at this point.

Raj Singh -- Chairman, President, and Chief Executive Officer

Yes. We have a board meeting coming up at the end of August. That is an agenda item to be discussed in our capital strategy going forward. I wouldn't be surprised if the board wants to see a deep dive into CECL and the impacts because CECL will eat up some capital, at least not regulatory but certainly GAAP capital.

So we want to sort of form up all of that. And then the board will decide what to do, whether to act now or maybe wait a couple of more months. There is some more room to do a buyback, but we need to nail down CECL numbers.

Ken Zerbe -- Morgan Stanley -- Analyst

OK. Great. Thank you.

Operator

And our next question will come from line of Jared Shaw with Wells Fargo Securities. Your line is now open.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi. Good morning.

Raj Singh -- Chairman, President, and Chief Executive Officer

Good morning.

Tom Cornish -- Chief Operating Officer

Good morning.

Jared Shaw -- Wells Fargo Securities -- Analyst

I guess just following up on the New York City multifamily. Of the $2.4 billion at the end of the quarter, how much of that is tied to properties that are impacted by rent control legislation?

Leslie Lunak -- Chief Financial Officer

So, as of kind of end of May, that number was $1.4 billion. I don't -- we had disclosed that previously. I don't expect that number has changed very much, but we're in the process right now of doing a real deep dive into that portfolio in terms of what's in there and how each of the loans is going to be impacted. But it was about $1.4 billion as of the end of May, and I'm sure that number hasn't moved.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. OK. Thanks. And then on the margin discussion, you said that you're assuming three rate cuts in 2019?

Leslie Lunak -- Chief Financial Officer

Yes, correct.

Jared Shaw -- Wells Fargo Securities -- Analyst

And then for the full year margin, under that scenario, that we could be in the 2.40s, so a pretty significant decline in --

Leslie Lunak -- Chief Financial Officer

Yes, high 2.40s.

Jared Shaw -- Wells Fargo Securities -- Analyst

High 2.40s, OK.

Leslie Lunak -- Chief Financial Officer

But obviously it was predicated on a fairly broad set of assumptions, but --

Jared Shaw -- Wells Fargo Securities -- Analyst

Right. On the deposit side, are you starting to see any relief on the -- especially the promotional pricing in Florida. Last quarter, you said that, that market still remained highly competitive. Are you starting to see any pullback there? And with three rate assumptions -- three rate cut assumptions, how much of that do you think still flows through to the new money cost on deposits?

Raj Singh -- Chairman, President, and Chief Executive Officer

So the big movement has -- that we have seen this quarter was actually in the brokered market, fairly significant move. Brokered market is leading that and rates have come down meaningfully. Retail market and commercial market have not moved so much, but I suspect that is going to change literally the day after the Fed announces. For some reason, that market waits -- doesn't look at the forward curve or the probability of a rate cut, but they want to wait for the rate cut.

So we're expecting that to happen shortly and that market to move. There have been some reduction. Some online players have pulled back, and we're seeing some relief over there, but not much to talk about. Really, the big relief this quarter was more on brokered and, of course, generating DDA is always the best antidote for deposit pressure -- for deposit pricing pressure.

Tom Cornish -- Chief Operating Officer

I might add one point on the multifamily question that you asked, the $1.4 billion. Our predominant exposure is all today in stabilized loans.

Leslie Lunak -- Chief Financial Officer

Yes.

Tom Cornish -- Chief Operating Officer

So we actually have a very modest exposure level today to loans that would currently be in a reposition or value-add perspective. Those would be the loans that would be most significantly impacted by the regulations. So our -- the stabilized portfolio makes up the lion share of our overall portfolio and exposure to things that will be more negatively immediately impacted is very modest.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. Great. Thanks for the color on that. And I guess just finally for me on the expenses.

With the move down quarter over quarter, how much of that is sort of directly related to the BKU 2.0 process? And is this a good pace to assume as it layers in?

Leslie Lunak -- Chief Financial Officer

Some of it is directly related to the 2.0. Another significant component is the termination of our residential mortgage servicing operation, which took place back in the first quarter. So you're seeing the full impact of that in the second quarter. Those are the two largest components along with some branch closure activity that took place back in 2018.

So all of that added together, I don't actually -- I tried to do this, but it's harder than it sounds to actually carve it up and say x dollars is this and y dollars is that because there's a lot of moving parts, but those are the three components. And the largest would be the termination of our mortgage servicing operations at this point.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. Great. Thanks so much.

Operator

And our next question will come from the line of Brady Gailey with KBW. Your line is now open.

Brady Gailey -- KBW -- Analyst

Hey, good morning, guys.

Raj Singh -- Chairman, President, and Chief Executive Officer

Hey, Brady.

Tom Cornish -- Chief Operating Officer

Good morning.

Brady Gailey -- KBW -- Analyst

I just wondered if you could quantify how much specific loan loss reserves you all released in the quarter. I'm just trying to figure out if you exclude those kind of onetime in nature releases, what the provision would have been in 2Q?

Leslie Lunak -- Chief Financial Officer

Yes. It's $2.9 million, Brady.

Brady Gailey -- KBW -- Analyst

OK. So, it's still a pretty low provision level. I mean if you look at the couple of quarters before this one, you all were more in kind of the $10 million to $12 million range. I know the provision can be driven by growth and kind of hard to forecast, but would you expect the provision to transition kind of back up to that $10 million quarterly run rate for the back half of the year?

Leslie Lunak -- Chief Financial Officer

So Brady, it's really hard to say. I mean the moving parts in the provision are the specific reserves. They are what happened to our -- the trends in a historical loss rates, which have been trending down, which is part of the reason you're seeing what you're seeing. And then the always elusive qualitative reserve factors, which -- there's a pretty defined framework for, but those can move in either direction.

I would expect the provision to mainly respect provisioning for new production to reflect provisioning for new production in the absence of the one-off credits here or there, where you have to put up a specific reserve, which really is difficult to predict.

Raj Singh -- Chairman, President, and Chief Executive Officer

Remember, Brady, this $2.7 million that Leslie is talking about, it was probably put into reserves a quarter or two ago. So you back it out here --

Leslie Lunak -- Chief Financial Officer

Big numbers.

Raj Singh -- Chairman, President, and Chief Executive Officer

You've got to back it from there as well. So these things do happen. We are very conservative when we see a -- and actually come up with the loan, we're very quick to put up a reserve and then they should -- that's resolved a quarter or two later and then we're reversing it. Anyway, we're looking at an interesting discussion for the next two quarters, absolutely.

Leslie Lunak -- Chief Financial Officer

Yes. The world will change.

Raj Singh -- Chairman, President, and Chief Executive Officer

It is going to get very, very interesting when we adopt CECL. And we've had very robust discussion internally in the company as to how all of you will think about bank earnings because I think it's going to add to a tremendous amount of volatility quarter over quarter. And how you will decipher our results in the CECL framework will be interesting to see.

Brady Gailey -- KBW -- Analyst

OK. All right. Thanks for that. And then on the CECL topic, I doubt you guys are ready to disclose the range.

But bigger picture, if you look at BankUnited's loan loss reserve of around 52 basis points, I mean that's well below peer average. Is it right to think that BankUnited's CECL impact will be greater than the peer average?

Leslie Lunak -- Chief Financial Officer

I can't speak to that because I have absolutely no view into what the peers are going to do. But I can -- what I will say, Brady, is because of the fact that the portfolio includes a fair number of longer-term loans and we're moving from an incurred loss model to an expected loss model, I do expect the reserve to increase. I'm not prepared at this point to say by how much, but it's fair to say that I do expect the reserve to increase. And that, that will be the primary driver of the increase is that expected loss concept over the portions of the portfolio and then longer contractual lives.

Brady Gailey -- KBW -- Analyst

All right. Great. Thanks, guys.

Operator

Thank you. And our next question will come from Steven Alexopoulos with JP Morgan. Your line is now open.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey. Good morning, everybody.

Raj Singh -- Chairman, President, and Chief Executive Officer

Hey, Steve. How are you?

Steven Alexopoulos -- J.P. Morgan -- Analyst

Good. To start on the deposit side, Raj, the growth in noninterest bearing is obviously very strong. Can you give more color on what drove that and how sticky the balances are?

Raj Singh -- Chairman, President, and Chief Executive Officer

It's -- so up until this quarter, our DDA growth had been very uniform across our business lines. This quarter, we saw a little more skewed toward the national deposit business line. How sticky it will be, how much it will move? It moves around because literally, on a day-to-day and week-to-week basis, it moves around, but the general direction is very strongly up. That's why I said it's better to look at clearly 12 months rather than any one quarter because last quarter, we had $90 million of DDA growth or something like that, if I remember the numbers right.

Leslie Lunak -- Chief Financial Officer

Correct. Yes.

Raj Singh -- Chairman, President, and Chief Executive Officer

So $90 million isn't right and $335 million isn't right. If you want to think about long term, you've got to think about instead of a more stable number, which emerges only if you look at a few quarters and average them out. So it's really hard because -- especially DDA moves around quite a bit because people are using these accounts on a day-in, day-out basis. And the quarter I closed two or three days before, the number would have been very different.

If it closed two or three days after, the number would have been very different. So I prefer an average of four quarters rather than any one quarter as a way of looking at this. But the fact that we've grown $784 million in DDA over the last 12 months, I think that is something to celebrate more than the $335 million this quarter. I wish it's even more than $335 million next quarter and maybe it will be.

But over the last 12 months of $1.7 billion plus of deposit growth of which $1 billion is interest-bearing and $780 million or so is noninterest bearing, that actually is the real story.

Tom Cornish -- Chief Operating Officer

I might add to that. If you look at the underlying noninterest DDA accounts, you're generally talking about commercial DDA and you're talking about relationships that while the balances, as Raj pointed out, obviously move, virtually all of the growth is coming from relationships that are heavily tied to very complex TM relationships and implementation of a number of product sales. So we think the overall business itself while the balances may fluctuate, the trend lines and solidity and stickiness of the business is good.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. That's helpful. And then on the margin, I'm trying to parse out the impact from the Fed potentially lowering rates here in terms of the new guidance. Can you help us think about, just for every 25-basis-point change in the Fed funds rate, what do you approximate that change in NIM to be from that?

Leslie Lunak -- Chief Financial Officer

Steve, I don't have those specific numbers in front of me. I think the phenomenon you're seeing with NIM compression, one, LIBOR has tended to lead Fed funds a little bit, so we're seeing our assets reprice before our liabilities. The balance sheet as a whole is managed to a pretty -- as neutral level as we can manage it from an interest rate risk perspective, but we will see some lag between when assets reprice down and when liabilities reprice down. And so that's going to cause some short-term NIM compression over the next couple of quarters before it levels off.

But again, we're looking at something in the high 2.40s based -- our best estimate today for the year as a whole.

Raj Singh -- Chairman, President, and Chief Executive Officer

So, Steve, one of the things, the benchmarking that we do against our peers, we have about two dozen peers from the biggest banks to banks that are even smaller than us, and we look at what kind of cost of funds or cost of deposits move they've had versus us. And over the last three or four quarters, we've not been faring well. Our betas have been higher. So last quarter, for example, our cost of deposits moved up by 17 basis points or so.

This quarter, we moved 3 basis points. And while we were in that list of 24 names, we were somewhere near the bottom. This quarter, we are -- I think last we saw we were, not everyone had reported, but of the people who had reported, we were No. 3.

So if I was to get technical, I would say high -- if our deposit basing has an inherently high beta, it hurts you on the way up but it should help you on the way down. Certainly, there is a lot of assumptions built into that statement, mostly trying to make an estimation of what the marketplace will do and will people behave the same way down as they did up. But I'm actually fairly optimistic that Fed lowering rates is not the worst thing in the world for our balance sheet.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Yes. Yes. That's helpful, Raj. Just one follow-up to Jared's question, how much of the $40 million expected cost saves are now in the run rate? That wasn't clear to me.

Raj Singh -- Chairman, President, and Chief Executive Officer

Yes. We can't give you that number. It's very hard to tease it out. We have tried.

Leslie Lunak -- Chief Financial Officer

It's still -- I think we'll have a better ability to do that as we get a couple more quarters down the road, Steven. We've just gotten into this implementation phase and all of these things are just starting to happen. And right now, it's a little -- it can be a little difficult to tease out what does this dollar relate to versus what that dollar relates to. But we are definitely seeing positive trends, and we're encouraged by that.

Raj Singh -- Chairman, President, and Chief Executive Officer

Yes. But, Leslie, is it fair to say that a majority of this is still ahead of us than behind us?

Leslie Lunak -- Chief Financial Officer

Yes. Yes. That's fair.

Raj Singh -- Chairman, President, and Chief Executive Officer

We just started. It's the seven-quarter journey, and we're only one quarter in.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Very good. Thanks for taking my questions.

Raj Singh -- Chairman, President, and Chief Executive Officer

All right. Thanks, Steve.

Operator

And our next question will come from the line of Austin Nicholas with Stephens Inc. Your line is now open.

Austin Nicholas -- Stephens Inc. -- Analyst

I appreciate the comments on the margin. But I guess, just to dovetail on that, I guess, it's fair to say that the impact for the first rate hike is going to be more impactful than the last couple as you -- your liabilities reprice faster than your assets and you kind of -- and you probably have a little bit less impact as you kind of enter into 2020. Is that fair to say as we think about your margin guide?

Raj Singh -- Chairman, President, and Chief Executive Officer

I think what I'm saying is that we have suffered from a higher beta on the way up. And by that logic, we should benefit from a higher beta on the way down. So I'm making a comparison, our deposit pricing versus our peers. I'm not trying to make a comment on our assets versus our liability repricing.

It's more our liabilities versus our peers' liability. We're seeing that already this quarter with our cost of deposits moving up 3 basis points, and I think I saw JP Morgan and BofA move 4 basis points, and Wells Fargo moved even more than that, and banks our size were at 8, 9 and 10 basis points. So already this quarter, we're seeing our deposit grow -- cost of deposit going up less than others. And when the curve turns and starts to go the other way, hopefully, we will see the benefit of having a higher beta at least for the foreseeable future.

Austin Nicholas -- Stephens Inc. -- Analyst

That's helpful. And then maybe just as we're talking about deposits, can you maybe just give us a feel for what type of businesses the national deposit team targets? I know you've spoken about this in the past. But any update there or maybe any specific types of deposits that drove the growth there. And then if you were able to kind of disclose the kind of overall deposits you'd maybe associate with that group?

Raj Singh -- Chairman, President, and Chief Executive Officer

So I have talked several times about the industry that they focus on and that has not changed. What has changed, one, is just to focus on DDA rather than total deposit growth. But more importantly, the average ticket size we have taken down quite dramatically. Larger accounts tend to bring in growth quickly and give you instant gratification on just volume numbers but tend to be just much tougher on price.

So we have quite meaningfully changed -- if you look at our pipeline and even stuff that we've won so far this year, it is -- it's no longer $20 million, $30 million, $50 million or $100 million accounts. While there are a couple of big accounts, but the vast majority of those accounts are single-digit millions and sometimes even below $1 million. So the story really here is not that we're focusing on any new industry than what we've talked about in the past, but focusing more on smaller accounts, which tend to be less price sensitive, more sticky and, honestly, harder to get. And they take a long time to break in, but we've been at it now for a while, and we're seeing success.

Austin Nicholas -- Stephens Inc. -- Analyst

Understood. And then maybe just on the previously covered portfolios, do you happen to have the unpaid principal balance and accretion on those?

Leslie Lunak -- Chief Financial Officer

The carrying value is $184 million. I don't have the total accretion number in front of me. I do have the yield. I think it's in the press release.

No, I don't have it. I don't have the accretion number -- four days. [Inaudible] I'm looking at some [Inaudible] maybe show you here in a minute. So the balance is $184 million.

I want to say the yield is somewhere in the low 30s, but I'm going to get somebody to confirm that for me.

Austin Nicholas -- Stephens Inc. -- Analyst

OK. Thank you. And then just one last one. I think we spoke about the multifamily portfolio in New York, and I appreciate the comments on the value-add loans.

But maybe can we just clarify how you think about what constitute the value-add loan? Is it really borrowers that had the strategy of increasing rent stabilized rents up to higher market rents within their business strategy? Or is it loans that were maybe actually underwritten with that assumption?

Tom Cornish -- Chief Operating Officer

No. It's the former. So there is -- in the value-add, there is in-place cash flow that does not necessarily meet the long-term debt service coverage ratio strategy, but there is enough in-place cash flow in order to cover the debt service on 1:1 times. Our value-add portfolio, though, is extremely small right now.

Austin Nicholas -- Stephens Inc. -- Analyst

OK. Great. Thanks for taking the questions.

Operator

Thank you. And our next question will come from the line of Lana Chan with BMO Capital Markets. Your line is now open.

Lana Chan -- BMO Capital Markets -- Analyst

Good morning. I just had a few small questions on things that have been asked already, one on the multifamily portfolio. Is there a risk that with given the potential declines in property values on rent reform, do you see any risk in terms of having to build reserves as those property values potentially come down a bit?

Leslie Lunak -- Chief Financial Officer

Lana, as long as the portfolio was performing, which we don't see today, any reason to expect that, that would not be the case going forward, I don't expect it to have a material impact on credit cost. I do see an element of potential refinance risk where -- and there are less refinancing opportunities for some of these borrowers potentially in that situation, although maybe not but I don't really see it today as being a credit event.

Lana Chan -- BMO Capital Markets -- Analyst

OK. And of your of $7 billion of CDs, how much of those would be broker deposits? As you've said that rates have come down pretty meaningfully in the marketplace.

Leslie Lunak -- Chief Financial Officer

About 14% of our total deposits are brokered, Lana, and that's a combination of CDs and money market. I don't have the breakdown in front of me, but it's about 14% of total deposits that are brokered.

Lana Chan -- BMO Capital Markets -- Analyst

OK. Great. And then just last question on expenses. As we think about the impact of BKU 2.0 into 2020, as the onetime cost likely, I think, drop away in 2020, excluding those year over year, should we expect expenses to be lower even excluding those onetime costs?

Leslie Lunak -- Chief Financial Officer

For 2020?

Lana Chan -- BMO Capital Markets -- Analyst

Yes.

Leslie Lunak -- Chief Financial Officer

Yes. And I'm not quite prepared to quantify that precise -- with precision yet, but the overall answer to the question is yes.

Lana Chan -- BMO Capital Markets -- Analyst

OK. Thanks, Leslie.

Operator

Thank you. And our next question will come from the line of Stephen Scouten with Sandler O'Neill. Your line is now open.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Good morning, everyone. I'm curious, Leslie, with the expense guidance, the down 3% to 4%, is that really the same guidance as last quarter versus the flat guidance when we're excluding the onetime items or are you guys ahead of schedule slightly on your expense progress?

Leslie Lunak -- Chief Financial Officer

We're little bit ahead.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Great. And then thinking about the NIM, if I remember correctly, you guys have a lot of loans that are tied to three-month LIBOR and, obviously, that was down pretty significantly in the quarter. So --

Leslie Lunak -- Chief Financial Officer

It's actually one-month LIBOR.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

It's one-month LIBOR, OK. So have you seen most of the impact already in loan yields in 2Q from the move we've seen today in LIBOR, is that already encapsulated?

Leslie Lunak -- Chief Financial Officer

Yes, but that may not be the end of what we see with LIBOR.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

No, absolutely. In the absence of any further cuts here. And then on the deposit pricing side, I don't know if I missed this, but do you guys have a thought or a target of what you are assuming for a deposit beta on the way back down for subsequent rate cuts?

Leslie Lunak -- Chief Financial Officer

There is a very wide range depending on -- we analyze betas at an extremely granular level in our deposit base. So some of them we think will be beta one because we have some relationships that are fortified with fed funds. So those will come down with the beta one. Everything we think went up with the beta of one, we think will come down with a beta of one.

But if you get down into the small business and money market, it's going to be significantly less. We're hopeful, to Raj's point, that the betas on the ways down are very similar with what they were on way up.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Super. Thanks for the color, guys.

Operator

Thank you. And our next question will come from the line of Brocker Vandervliet with UBS. Your line is now open.

Brocker Vandervliet -- UBS -- Analyst

OK. Great. Thank you. I didn't see the return the ROE -- ROA targets in the deck.

Are they there and I just didn't see them or have they disappeared?

Leslie Lunak -- Chief Financial Officer

We have not changed them. We haven't changed the guidance we put out. The only caveat I will put to that is with all of the uncertainty right now around the rate environment and the curve and whatnot, that's something over which we have no control but will ultimately impact both ROA and ROE. But as of now, we haven't changed those targets.

Brocker Vandervliet -- UBS -- Analyst

OK. And just going back to the reserve and the qualitative risk factors, and it sounds like you're releasing reserve this quarter, but you're flagging also that CECL is a real issue and could be large enough that perhaps you push out buyback. Why release the reserve? I think you can maybe talk about the qualitative reserve calculation.

Leslie Lunak -- Chief Financial Officer

I see two things here in your comments. I think you may have misconstrued the remarks about CECL and buyback. I don't think we said that CECL will cause us to push out buybacks. I think what Raj said was that before they do another authorization, the board is going to want to see some more definitive estimates around what those numbers are going to be.

I think those are two very different statements. And secondly, there is a gap as it exists now, and today, in calculating my reserve, those are rules that I have to follow. And there was a gap as it's going to exist in 2020, and starting in 2020, those are the rules that I have to follow. So I am going to change my reserve methodology in anticipation of CECL and the driver of an increase in reserve will be the contractual life of the portfolio, not any different.

It's not something about fundamental credit quality. Does that make sense?

Brocker Vandervliet -- UBS -- Analyst

It does. It's just -- my understanding of the qualitative component was that that kind of allows a management to sort of toggle over and above what the absolute accounting calcs may be.

Leslie Lunak -- Chief Financial Officer

No, it's not. No. The qualitative component is built around a defined framework, and we need to stay within the confines of that framework. It's not something that just allows us to set reserve levels arbitrarily.

Brocker Vandervliet -- UBS -- Analyst

OK. Appreciate the color on CECL and the buyback.

Operator

Thank you. And our next question will come from the line of David Chiaverini with Wedbush Securities. Your line is now open.

David Chiaverinit -- Wedbush Securities -- Analyst

A couple of questions for you starting with loan growth. What loan categories do you expect to drive growth going forward? Should it continue to be resi? You mentioned about how CRE in total is flattish, but C&I was somewhat weak this quarter. I was just curious about the outlook?

Tom Cornish -- Chief Operating Officer

Yes. So, we saw -- if you look at the C&I book, we actually saw very, very good quarter of production. But we also saw kind of a very high level of payoff activity this particular quarter, a lot of that was around private equity companies moving out, selling companies, other things that were sort of blips on the radar screen, if you will, and what we sow in the payoff activity. So I would say we'd be balanced across most of the units.

We continue to expect growth in residential. We continue to expect growth in the Bridge subsidiaries. We'll see it in the C&I business segments, both in corporate banking and in the commercial banking segment. We'll see it in small business as we launch forward with a lot of the small business initiatives that are embedded in our BankUnited 2.0.

So I think it'll be pretty broadly across all categories, probably the lightest one will be CRE. Only because of what we're seeing in the multifamily space in New York and also we're seeing -- while it's been a good first two quarters of CRE growth in Florida. And the -- we are seeing continued significant asset sales in that market. So overall production is very good, but we are -- our ending number tends to move more up on payoffs than it moves on production.

Our production is actually pretty stable.

Raj Singh -- Chairman, President, and Chief Executive Officer

Even Pinnacle, which has been the only business line that has not had good origination for the last year and a half, even that business is now stabilized and we're seeing some modest growth outside, of course, the loans that we move to held for sale. So outside of that, the core business is actually stable -- or has stabilized and beginning to grow modestly.

David Chiaverinit -- Wedbush Securities -- Analyst

And as it relates to Pinnacle, you mentioned about how the profitability of these loans are less profitable in the new tax environment. I was curious, is that because you're not paying tax on the interest income on these loans?

Leslie Lunak -- Chief Financial Officer

That's correct. Protecting them.

David Chiaverinit -- Wedbush Securities -- Analyst

Got it. And how big is the Pinnacle portfolio now?

Raj Singh -- Chairman, President, and Chief Executive Officer

About $1.5 billion including the loans that we moved to held-for-sale.

David Chiaverinit -- Wedbush Securities -- Analyst

All right. Thanks very much.

Operator

And our next question will come from the line of Christopher Marinac with Janney Montgomery. Your line is now open.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Thanks. Good morning. Leslie, I know you talked to Steve's question a couple of callers ago about the NIM change. I was curious if the first Fed cut is worse than the third or should we think of it in the opposite way?

Leslie Lunak -- Chief Financial Officer

So, I don't know so much that I would think of it as the first cut being worse than the third cut as I would think of it more -- you're going to see more pressure in the first couple of quarters as your assets reprice down more quickly than your liabilities. So I just -- I think it's more a timing thing than a number of -- yes. But it isn't linear, you're right about that.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

OK. That's helpful. I appreciate that. And then just a question on the growth of the franchise lending.

Is all of that restaurants or that -- would that be some other types of franchises besides just restaurant?

Tom Cornish -- Chief Operating Officer

Yes, it's multiple strategies built around a large portion of QSR restaurants. There's also a significant component of fitness and there is a significant component of non-food-related franchise type auto services businesses and things like that in the portfolio.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Is there any particular trend on the food side, like good or bad, is that area just sort of borrower dependent?

Raj Singh -- Chairman, President, and Chief Executive Officer

I would say that the trends in that business are -- and it's something that we're watching carefully. The trends in that business continue to be reasonable top-line demand at the food level, but there is pressure in the cost structure, both from a labor and resources perspective. And the need, I think, for investments in technology is also significant in that business as people move toward digital demand, control, and client experience opportunities.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Great. Thanks for the additional background there.

Operator

Thank you. This will conclude our question-and-answer session for today. It is now my pleasure to hand the conference back over to Chairman, President, and Chief Executive Officer Raj Singh for any closing comments or remarks.

Raj Singh -- Chairman, President, and Chief Executive Officer

Thank you, Bryan. Once again, I just want to thank everyone for joining us, and that we're very excited about how this quarter turned out and even more excited about what is in front of us for the rest of the year. Thank you, again, and we'll talk to you again in three months. Bye.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Susan Greenfield -- Corporate Secretary

Raj Singh -- Chairman, President, and Chief Executive Officer

Tom Cornish -- Chief Operating Officer

Leslie Lunak -- Chief Financial Officer

Ken Zerbe -- Morgan Stanley -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Brady Gailey -- KBW -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Austin Nicholas -- Stephens Inc. -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Brocker Vandervliet -- UBS -- Analyst

David Chiaverinit -- Wedbush Securities -- Analyst

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

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