BankUnited Inc (BKU) 2022 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2022 BankUnited Earnings Call.

(Operator Instructions)

I would now like to turn the call over to your host, Susan Greenfield, Corporate Secretary. You may begin.

Thank you, Kevin. Good morning, and thank you for joining us today on our third quarter 2022 results 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 may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries or on the company's current plans, estimates and expectations.

The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including, without limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by external circumstances outside the company's direct control. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2021, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website, www.sec.gov.

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

Thank you, Susan. Welcome, everyone, to our earnings call. Thanks for joining us. And let me start by just highlights for the quarter.

Net income came at $87.9 million, $1.12 per share, a nice 37% increase in EPS, ROE came in at 13.5%. We're very happy with those results. This growth in earnings are really driven because of NIM expansion. I'd like to remind everyone that we're not very asset-sensitive or a little asset-sensitive, but we're -- I think we're writing business at better margins, which is helping and of course, a slight sensitivity is also helping.

So our margin expanded by 13 basis points compared to last quarter. We're 2.76% this quarter. Last quarter, we were at 2.63%. And if I remember well, third quarter of last year, we were at 2.33%. So nice trajectory there.

Our core C&I and CRE businesses grew by $444 million this quarter. This was, of course, partially offset by declines in mortgage warehouse which is -- and a slight decline in Pinnacle and Bridge as well. But mortgage warehouse declined a little less than $200 million. I think the utilization now is at a historically low level given everything that's happened in the mortgage origination business.

Consistent with the (inaudible) trends and the effect tightening, deposits declined by $1.1 billion. Our noninterest DDA declined by $851 million, but NIDDA, now it still stands at 32% of total deposits.

I'd like to remind everyone that this journey of building NIDDA, which is like 5 years in the making now, when we started on this journey, which was, let's say, going back in 2017, our DDA balances were just 14% of our total deposits. Even before the pandemic, which was, let's say, the end of '19, we were only at about 17.5%, and today, we're at 32%. I don't like seeing these declines happen. We'll talk a little more. Tom will get into the details of where this is coming from. A large part, about half of it is coming from one particular business line, and Tom will shed some more light on that.

But despite that, for this year, for 2022, if you just take like a 9-month view, NIDDA is down by $182 million because in the first part of the year, we were growing NIDDA this quarter, we shrunk. Overall cost of deposits came in at 78 basis points. Again, given how fast the Fed is hiking, you should expect this to keep climbing up. I think last quarter, last year, we were at 30 basis points, so 30 to 78 basis points now.

Really quick in the last week of this quarter, we were hit by Hurricane Ian. I'm happy to report that there were no significant damage to our facilities. Our people are all safe, and we're reaching out to our customers who might have been impacted. So far, the information that we've compiled, we don't expect a material impact on credit. Having said that, we did put $5 million into our provision just in case. As the next few days and weeks roll on, we might have a credit here or there for that purposes. We did take a $5 million provision. That's included in our numbers.

We're not seeing any systemic credit issues. We're looking very hard turning every walk trying to find any issues that they might be out there because as the economy is slowing, it's natural to be very, very careful. But so far, we really have nothing to report. In fact, our criticized classified loans, they continue to decline. This quarter also, it was a very healthy decline of $175 million.

Excluding the guaranteed portion of our SBA loans, the NPA ratio stood at 32 basis points, which is a very small uptick from prior quarter. And annualized net charge-offs for the 9 months, not this quarter, this quarter was very low, but for the 9 months stood at 16 basis points, that compares to 29 basis points of net charge-offs for last year.

So we're happy about that trend as well. As you already know, we did -- the board did authorize another $150 million buyback sometime mid-September. We have executed about $11 million of that already through the end of the quarter and continue to -- we'll continue to judiciously execute on that as time goes on.

So if you take all the buybacks that we've done so far through the end of September, I think the number comes to about $337 million. In terms of quickly updating the guidance that we've given you, we expect loan growth for the year to come out at about mid-single digits, driven again by C&I, CRE. By the way, CRE was a positive quarter, which is -- we have not said that now in many, many quarters. So we finally have -- it's not a very big positive, but it is a positive quarter, and we're very happy about that. We're now sort of inflected on to the other side of now growing CRE. C&I still will be the largest driver of growth, C&I small business, middle market lending, all doing well pipelines are very healthy.

In terms of deposits, I think deposits, this will be a challenging environment. I expect deposits this coming quarter to be get under pressure somewhat, both NIDDA and total deposits and cost of deposits will climb as the effect keeps tightening.

We're expecting another 75 basis points here in a few days and then another move in December. So having said that, margin overall should still -- we're still positively biased when it comes to margins. So yes, deposit costs will go up. But our yield on assets, loans and securities would also go up overall. We still think there's room for margin expansion in the fourth quarter.

In terms of overall, I usually actually start with this, talking about what we're seeing with the economy. My comments will be very similar to what I said last quarter, which is that we're cautiously optimistic. We're looking very hard to see if there are any cracks appearing anywhere, but we're not finding them. We're talking to our peers. We're talking to smaller banks, bigger banks, nonbanks, we're trying to see where trouble will emerge, but we're not seeing it yet. Having said that, we're not sitting and assuming that everything will be fine, we are taking a view that long term, there will be a significant slowdown. And sometime next year, we just have to be careful. So this is not a time to be very brave and aggressive, but be a little cautious.

So our -- on the scale of that 1 to 10 that I described on the call last quarter, we say about the same where we were around the 6 in terms of cautiousness and optimism, and we'll keep revising it as more data comes along. But Florida is doing very well, and we're very thankful that the hurricane missed us for the most part.

Let me turn it over to Tom, and he'll get into a little more into the loans and deposits.

Great. Thanks a lot, Raj. So driving a little bit more into the loan number, as Raj said, the core C&I increase segments grew by $444 million for the quarter with $375 million coming from C&I and $69 million coming from CRE. It was the first CRE increase, as Raj said, that we've had in quite some time. We were happy with it. On the C&I side, it's kind of a continuation of what we have seen all year long, which is strong growth, strong growth in commitments and pretty broadly based across all industry sectors, if you look at some of the supplemental information that Leslie has provided and you look kind of industry by industry, it's pretty broadly based across 6 or 7 major industries.

These are the largest ones that we have exposure to. So we were happy with that growth for the quarter again. And the CRE segment, the largest growth that we had was in the industrial area, which is an area that we have been focusing on increasing our industrial portfolio, we say [$89 million] of growth in the industrial base. So we were also happy with that. C&I commitments grew by 6.6% quarter-over-quarter. We did have -- we thought it would be just slightly better, but we did have a few loan closings that got delayed at the very end of the quarter in Florida due to the impact of Ian that pushed into the fourth quarter.

On the mortgage warehouse side, as Raj said, they declined by $194 million at pretty historic low utilization rates in response to the macroeconomic environment around the residential real estate business. It's a cyclical business. We recognize that. We like this business, remain committed to it. Our overall client base is strong in the group. There's been no deterioration in the client base. But we can't outrun the cycle right now in that business.

In the aggregate, we saw a runoff of about $77 million in Pinnacle and Bridge. We continue to struggle to find the right profitability opportunities and margin opportunities in that business. And given that we've got good core growth in other areas, we're being selective in those segments to make sure that they're profitable for us and help us in what we're trying to accomplish. As we look forward into this quarter, C&I and CRE pipelines look strong. We're already seeing good growth in the quarter.

So overall, I'm optimistic about kind of core growth in those markets heading into the fourth quarter. From a deposit perspective, as Raj mentioned, total deposits declined by $1.1 billion for the quarter of which $851 million was NIDDA, A significant portion of the deposit outflow business we saw in the quarter in commercial was related to businesses in the residential real estate ecosystem.

About half of the NIDDA runoff for the quarter was related to clients in the title insurance industry. We've made over the last few years a major investment in this segment and balances can be cyclical as well. But I would say the good part is we've continued to add new relationships. There's not a lot we can do about the decline in activity in the residential market. So we have a client base there that we see average balances per account down, there's not too much we can do about that. But the addition of new account business has been very encouraging. Our new account business in the title industry is up 25% this year over last year.

And in general, we see very strong new account growth across all areas of the bank. I think you can also see that reflected in service charge income, which year-over-year was up 13% and quarter-over-quarter was up 2.8%. So given the environment of increased earnings credit rates and things like that to be up over in service charges, I think it's good reflection of the fact that we're continuing to generate a lot of new opportunities for new account business throughout the bank.

We saw some general decline in the corporate deposit base over the quarter. That was really kind of all episodic, no real relationship losses, but you may have had a dividend recap or a large insurance company pay, reinsurance costs or other things that were not related to any account loss opportunity, all of the areas where we saw some account rundown in the corporate business was all really reflective of sort of transactions within long-standing accounts where we have kept those relationships.

So we're not overly concerned about that. And for the most part, that's growing back. We also saw some decline in municipal deposits for the quarter, which tends to be kind of seasonal as you come into the municipal deposit quarter. Overall, the loan-to-deposit ratio ended the quarter at 89%. So I'll turn it over to Leslie to get into more details about the quarterly results.

Thanks, Tom. Consistent with the guidance we gave you at the beginning of the quarter, we did see the NIM increase this quarter to 2.76% from 2.63%. The yield on investments increased to 3.12% from 2.12%. The duration of this portfolio is very short, right at 2 at September 30. Yield on loans increased to 4.11% from 3.59%. In all of this, we saw resetting of the coupon on variable rate instruments, new production and new securities purchases at wider spreads and higher rates that drove that increase.

Cost of total deposits was 78 basis points for the quarter, up from 30 basis points last quarter. We have added some term in the deposit book. We did that intentionally. Time deposits grew by $976 million in the third quarter. We took advantage of the opportunity to lock in some term in the deposit book in a rising rate environment.

Total deposit beta for the year at about 29%, about 46% for interest-bearing deposits only. And compared to the peak of the last typing cycle where our total deposit beta was about 61%. We continue to expect betas to be lower this cycle in part because NIDDA represents a larger portion of the book. And I'll draw your attention to Slide 6 in our deck when you have a chance to look at it, where you can see that deposit costs are, by all categories, lower today at September 30 was a Fed upper bound of 3.25% than they were at 12/31/19 with a Fed upper bound of 1.75%. And I get that we're still midstream in this hiking cycle, but I still think that supports our expectation that (inaudible) will be lower this cycle than they were last cycle.

As Raj said, we do expect NIM expansion in the fourth quarter, probably not quite as much as we saw in Q3, but we do expect the NIM to continue to expand. Even if we have some amount of additional NIDDA runoff, which we hope doesn't happen, but even if it does, we still expect the NIM to expand.

The reserve and the provision, the reserve as a percentage of loans was flat to the prior quarter at 54 basis points, not really seeing any deterioration in credit of note. And as Raj mentioned, the qualitative ACL includes $5 million related to the potential impact of Hurricane Ian. Noninterest income and expense, I'll hit on that real quickly. The main reason for the increase in noninterest income compared to the prior quarter was really the mark we took on some preferred stock investments in the prior quarter and that did not recur this quarter.

So just compare quarter-over-quarter, that's the main reason for that variance. Increases in noninterest expense were primarily in the comp and technology lines as we've been guiding to all along as we invest in both people and technology to support our future growth and business strategy.

In technology, we're making investments in digital and payments and in certain aspects of our infrastructure, particularly around data and integrations. I will say that back at the beginning of the year, we gave you guidance of an increase in expenses of mid- to high single digits, and that's exactly where we're coming in. And that's exactly where we expect to land.

I will point out in that other noninterest expense line, there's a $2.3 million charge in there related to a write-off of a specific technology investment where we've just decided to go in a different direction. So that kind of inflated that line item for this quarter. And I will turn it over to Raj for closing comments.

Thank you, Leslie. I will actually open it up for Q&A. I know it's a busy day, and I appreciate all of you joining us, but let's get into Q&A.

(Operator Instructions)

Our first question comes from Ben Gerlinger with Hovde Group.

I was curious, Leslie, if we could start on the expense base. I know you just said that there was that write-down or write-off on one item. But when you think about the base overall, I know you gave pretty solid guidance at the beginning of the year. It's held true from that mid-single-digit to upper single-digit range. But when you think about this year relative to potentially next year, are you pulling forward any investment? And I know you haven't given complete guidance for FY '23, but you think of the trajectory, is it something to expect a similar range for next year? Or is this kind of pulling forward expenses?

I wouldn't say we're pulling forward expenses, but I'm not -- I don't think we're prepared at this point to give any 2023 guidance. We're just kicking off our budgeting and business planning process. So I would be, I think, going to hold on that one until our next earnings call because whatever I say I might end up (inaudible) to eat my words in one direction or the other. So I'm going to hold off on 2023 guidance.

It's a lower expense. It's -- we -- 3 of us haven't yet reached a consensus. We're still debating exactly how we're going to plan for next year. So we'll have a better view in about 4 to 6 weeks, and we'll probably share that only in January of the year.

Yes. But I don't think there's been any conscious attempt to pull anything forward. In answer to that part of your question.

Well, we're not backwards.

Yes.

Yes. That's fair. Okay. Well, that's good. Yes, I figured I'll take a shot at it, but I think about...

You're not [fast], right.

Yes. When you think about loans in general, it's good to see the CRE rebound. Hopefully, that trend continues higher. When you just think broadly speaking, I know that there's the initiatives kind of outside the initial footprint. Historically, you guys did the North Florida and Atlanta, potentially have something in the works in Texas in the medium term. When you think about the footprint and mix, are there any areas where you're consciously targeting either from a price perspective or you think that there is a niche that you could actually make some pay.

I think it's -- listen, we didn't talk much about in our comments, we didn't say much about Atlanta, which has been a big focus for us this year. I will give you an update that we have hired all but one open position, right? There's only one open position left, which is a junior level position, but all the senior people, whether it's C&I, CRE, it's credit, underwriting, it's treasury, services, everyone is in place. And we have booked a fair amount of business. We don't disclose geographically where our numbers break out. But it is exactly on track with what we thought we would be able to achieve, and we're happy with the very early success we've had.

Dallas, which is a different strategy, is also on track. Again, deposit only, not loans. We have been doing some work trying to understand the lending side in Texas, whether it's something we want to play and when we want to do that, we don't have a decision on that yet. We've been out there to the market. We've made a lot of participants. And we will have a view, hopefully, in the next 3 or 6 months, exactly what we want to go and do beyond, if anything. Also, we're looking at some other markets and you won't be surprised by them. They're not going to be out in Ohio or the West Coast or something.

It's going to be somewhere in the Eastern Seaboard markets that we may already be servicing a little bit out of Florida or out of New York. And those markets will probably be the next step. But like I said, we were deliberate in taking these steps. We just don't jump in. I want to make sure Atlanta is off to a very healthy start before we talk to you about something else. But sometime next year, we might introduce some other market. But that is really what will drive growth over and above, of course, what Florida is doing by itself being so healthy and where we're not seeing growth is in places like Bridge, as Tom talked about. We're looking at the best places to deploy capital. And wherever we don't find the good risk reward, we take away capital and we find investment in places where we do see a better return.

Yes, I might add from a product perspective since you asked that. I think as you look across the Southeast from a CRE viewpoint, it's clear that the fundamentals are very strong.

In Industrial, which we had a good quarter in industrial. They're strong in grocery-anchored retail that is predominantly service-oriented and population shifts in really all of the Southeast markets from a multifamily perspective are very strong. So I think as we think about our plan going forward, those are probably the asset segments and categories where we will look to increase portfolio and we think in Florida and in other parts of the Southeast, there's always a question about where the Florida is in the Southeast or not. But we'll include it for now, we think all of those asset segments are good quality opportunities for growth near term and in 2023.

Our next question comes from Brady Gailey with KBW.

It was a big move up in the bond yield of 100 basis points linked quarter. I know you have the short 2-year duration. But was there anything onetime in nature impact on that? And how do you think about that going forward? I'm guessing we could continue to see a decent amount of upside there.

I think you're right. I don't know it will be 100 basis points every quarter. But yes, I think we'll continue to see that go up. And no, there was nothing unusual that really drove that. It's just purely coupon resets on the variable rate portion of the portfolio, which is the majority of the portfolio and new purchases and better spreads.

Spreads are generally better, Brady, across the board, anything you're buying, spreads are better, but it's not like we're growing the portfolio by leaps and bounds. That's not what is causing the 100 basis points. So most of that is because it's a short portfolio, a short duration bond portfolio. And when rates move as aggressively as the Fed is moving them.

We see that.

You see the benefit.

Yes.

All right. That makes sense. And then my next question is on the buyback. You guys have been a huge repurchaser of your stock over time. It slowed a little bit in the third quarter. You only repurchased about a little under half of 1% of the company. So should we think about the buyback? Is 3Q kind of a good new run rate? Or do you think you'll be more active like you have been historically?

I think we ran out of our buyback middle of the quarter, if I remember well.

Kind of early in the quarter...

Early in the quarter. And then we got another authorization much later in the quarter. So sometimes the timing of board meetings and stuff gets in the way. So we're in the market. Even now, we're under a 10b5-1 with the full year plan. So we're executing -- we have said that we will be even more opportunistic given the volatility that we're seeing in the market, but we're still net core buyers of our stock, and we have the extra capital to do this. And as we keep creating capital, probably to do more. So -- but we do it $150 million at a time. So we've already -- I mean, in the 2 weeks from middle of September to the end of September, we did $11 million already. So that's a decent health clip because the stock was weak at that time. And so it will depend on where the stock trades at and we will be opportunistic.

Yes. And I do think in times when we expect that the market might be volatile, we're perhaps a little bit more opportunistic in our approach and in times where we don't think those opportunities are going to arise. So...

Okay. And then finally for me, optically, if you look at your reserve. And if you back out the mortgage warehouse loans, I mean, it's running at 55 basis points, which relative to peers is kind of thin. But how -- are there some adjustments we should make there, like backing out maybe some low-risk mortgages. Are there any adjustments that will make that ratio higher?

You know, Brady, I think -- yes, that's a good question. I think the mortgage portfolio overall, which is a big slug in the portfolio, carries very low reserves. They're not 0. But I think it's disclosed in our slides, I think it's like 11 basis points or something like that, very low reserves. So that's just an extremely high credit quality portfolio, very high FICOs, very low LTVs, almost no historical charge-offs. So that part of the portfolio carries very low reserves.

Pinnacle carries almost no reserve. That's an investment-grade portfolio. It really should be 0, but we can't get away with that, so we have to put something on it. I think even our CRE portfolio, you know Brady, the LTVs are so favorable that even in the event of default, it throws off very low LGDs. So I do think there's a lot of -- we're also in a geographic area. It's easy to talk about these macro GDP and unemployment numbers, but particularly in the Florida footprint, economic trends and demographics are still very strong. So all of that weighs on the blunt instrument of just comparing our reserve level to that of other banks.

Yes. The biggest adjustment that I would think you should consider is looking at the size of the resi portfolio. It is outsized compared to other banks, and it is a jumbo portfolio with a very, very pristine credit. That -- and a large part of it also to this government guarantee that Ginnie Mae approach.

Which has 0 reserve.

So that throws off the numbers and Pinnacle, which is about $1 billion is another one. Warehouse bank is small. Now...

It has no reserve. So I think you have to consider what's in the portfolio, when you do a kind of broad-based comparison to peer averages. There's no credit card in there. There's no auto in there. There's very little leverage lending in there. It's a pretty loan loss is historically, it's tended to be episodic, not systemic.

Next question comes from Stephen Scouten with Piper Sandler.

First, yes, we don't claim Florida in the Southeast as in Georgia just to note that. And one question on securities yields? I know Brady's question answered most of mine, but can you remind us how much of that portfolio? I know you said the majority is variable rate (inaudible) ballpark?

Yes, somewhere between 65% and 70% probably.

Okay. Great. And then on the new loan yield front, I think it was around 4.3% last quarter. Where were you guys seeing new loan yields this quarter? And I'm calculating around like a 35% loan yield beta give or take -- does that feel like a pretty good number moving forward for what you expect to see.

So on average, for the quarter, new loan yields were about 5.25 now much lower at the beginning of the quarter than at the end because obviously, we saw rates and spreads moved a lot during the quarter. But on average, that's what came on. And I don't know how you guys calculate loan betas to be honest. It's not a term that I've ever really embraced, but...

Yes. What I would maybe add to that is when you look at the kind of core portfolio today from a C&I and CRE perspective, the vast majority of new originations are floating rate originations. So if you looked at our CRE, that's not different for C&I than it's historically been. But if you look at the CRE portfolio 4, 5 years ago, we were taking more on-balance sheet rate risk and smaller CRE loans. Today, the majority of the loans are either floating or floating for us and swap the fixed rate for the clients. So our fixed rate exposure on new originations is pretty minimal today.

This has been actually a lot of hard work over the years in terms of changing, to what just Tom described, right, going from a fixed rate to a floating rate shop, that has been also a 3-year, 4-year transformation, slowly changing the business to be there. And that is helping us today.

Yes. And Raj, that leads to kind of my last question. Just at a high level, I mean, the bank is vastly different today than it was 4 years ago. Deposit base is different, run down the multifamily, different loan composition. What would you say, like as you look forward, is kind of the biggest differentiator or the biggest quality that you guys have today that will lead you to success moving forward as you see it?

It's that our clients love us. I don't know how to actually put that into the ratio or show it to you in financials, but that is what matters more than anything else that our clients come back to us for repeat business. We don't lose clients. We don't -- we may lose them on price and something stupid like that, but we never lose them because somebody is I'll give you an example. I'm on a board of a nonprofit and this nonprofit is raising some debt in the market. Obviously, BankUnited is not going to be participating. But I happen to be sort of running that process, and I'm looking at the incumbent bank and the CFO of this organization said to me, "I wish these people were just a little easier to deal with. It will be so much better if we just do business with them. But man, do they make our lives measurable." And without naming who the incumbent bank is a who I'm talking about, but just listening to that, you would never hear something like that about BankUnited. That's really the competitive edge.

We don't -- we're not a universal bank. We can't do everything for everyone. We do a few things for a few people. We know our spots. But when we do, we set about the clients, we're advocates for our clients and we build that trust over a long period of time. And that's really the differentiator. It sounds very simple and straightforward, but trust me, it's not easy to do in this business.

Yes. I would link to that. I think that part of the reason why clients love us is I think we have, over the last few years, created a culture in the organization. The talented people continue to join us from other organizations that have great client relationships and appreciate the culture and entrepreneurship that the organization has and drive for innovation and just the values that our company has. I mean that's also something we couldn't express in a ratio. But if you -- if we think internally what we've done under the principles that Raj has set forth, I think talented people want to be part of this company, and that's a big advantage.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Raj.

I know it's a busy day. Somebody here actually told me this morning that there were 18 banks that were releasing earnings. So I'm not surprised if there were a few questions. But we are here, both Leslie and I and even Tom are available to take any questions if they come up today and tomorrow, whenever. But we appreciate you joining us and giving us time. So we look forward to talking to you again in 90 days. Thanks. Bye.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.