BankUnited Inc (BKU) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen and welcome to the BankUnited 2012 second quarter earnings call.

My name is Rachel and I will be your Operator for today.

(Operator Instructions).

I would now like to turn the call over to Mary Harris, Senior Vice President of Marketing and Public Relations.

Please proceed.

Thanks, Rachel.

Good morning everyone.

It's my pleasure to introduced our Chairman, President and Chief Executive Officer, John Kanas but first I would like to remind everyone that this call contains forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995, that reflect the Company's current reviews with respect tom among other things, future events and financial performance.

The Company generally identifies forward-looking statements by terminology such as outlook, belief, expect, potential, continue, may, will, could, should, seek, approximately, predicts, intends, plans, estimates, anticipates, or the negative version of those words or other comparable words.

Any forward-looking statements contained in this call are based on the historical performance of the Company and its subsidiary's on the Company's current plans, estimates and expectations.

Conclusion 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 relating to the Company's operations, financial results, financial conditions, business prospects, growth strategy and liquidity.

If one or more of these other risks or uncertainties materialize or if the Company's underlying assumptions prove to be incorrect, the Company's actual results may vary materially from those indicated in these statements.

These factor should not be construed as exhaustive.

The Company does not undertake any obligation to publicly update or review any forward-looking statements 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 Annual Report on Form 10-K for the year-ended December 31st, 2011 available at the SEC's website, SEC.gov.

Mr. Kanas?

Thanks Mary.

You got an A for that.

Good morning, everybody.

Obviously we are very, very pleased with the results of the last 90 days.

We have been telling you the story for some time of the transition of a terrific institution in south Florida laboring under a number much issues not the least of which was a very slack economy in south Florida and as you can see, this is unfolding exactly as we had hoped it would and actually doing a little bit better.

The south Florida economy is definitely now making a contribution to the growth that we're experiencing as we continue to gobble up market share and take business away from our competitors down here, but we are definitely beginning to feel much more optimistic about the economy itself.

You heard me say last time that the excess supply of condominiums in south Florida was being slowly by surely absorbed.

That process has continued to a point where real estate values have not only stabilized but we've got two, three new buildings coming out of the ground just off Brickle Avenue in Miami and remind you that while we have almost a hundred branches all over Florida, that 80% of our franchise is in around Miami and Dade counties.

Portfolio for the quarter just under $49 million, $48.9 million.

A little better than the consensus estimate of 44 for six months, just under $100 million, $99.2 million, $.096.

The ROA for the quarter, for the six months rather, 225 and 166 and balance sheet growth bringing the balance sheet to $12.4 billion.

The real driving issue here for the quarter it the continuation of the growth of loans as we have been telling you for about 18 months as our brand grows stronger, and as we open new branches in commercial areas and as, unfortunately, weaker banks in Florida continue to fall behind.

We are continuing to grow new relationships every day, new loans grew over $500 million in the last 90 days to just under $3 billion.

New commercial loans, of that portion, the new commercial loans grew $373 million to about $2.2 billion.

So this is all new business since we got there.

If you remember when we got to Florida I think the total of all commercial loans was, of these loans, were $240 million, the deposits were $240 million.

The growth of new loans, again this quarter, out paced the resolution of covered loans resulting in net growth of the loan portfolio of about $370 million.

A total loan portfolio has reached over $5 billion, $5.1 billion, and covered loans now which were I think 58% at the end of the year are now about 43% of the loan portfolio.

So the story continues to unfold here.

Tangible book value rather at 1742 and tangible at 1668 making new highs.

We have actually seen a little bit of improvement which in that balance sheet is saying something in asset quality since it's a minute number, anyway our total amount performers actually dropped from .68% to .57% this quarter.

So all-in-all I can't imagine us having had a better quarter.

Everything is beginning to hit on all cylinders.

New branches are beginning to grow in their markets with the kind of deposits and loans that we want to see them originate.

So we are very, very pleased.

We're going to do this a little bit differently this morning I have asked two of my partners to chip in a little bit and give you a little bit more detail about their areas of the bank so I'm going to turn it over to Raj for a minute who will talk to you a little about a number of things not the least of which is deposit growth and after that he is going to kick it over to Doug who will talk to you about the rest of the detail.

Then we'll open up the line obviously for questions.

Raj?

Thanks, John.

The story on the deposit sites right side of the balance sheet is very much what John said.

It's a continuation of the story of a turf becoming a commercial bank.

Deposits are growing we're depositing $8.2 billion for the end of this quarter but the more important story is actually not the growth in deposits but it's that the Company has change of our deposit mix and our cost of funds.

The transaction accounts, the DDA and interest bearing demand, grew to $1.7 billion which is now over 20% of our deposit book.

The cost of funds declined to 84 basis points and continues to drop.

In fact, just last night I was looking at what it is as of last week and it has come down meaningfully from that number already this quarter.

So we expect deposits to continue to drop for the remainder of 2012.

Just also a reminder we have a lot of FHLB borrowing.

Some of them are maturing in the second half of 2012.

I believe it's about $360 million which is at 4.65% which will obviously renew that funding at a much favorable pricing.

Just to talk a little bit about mortgage, I run that as well.

On the mortgage portfolio of the $501 million in loan growth that we got $124 million of that was residential mortgages.

As you know, we like the jumbo space and we buy, also originate but mostly buy, jumbo paper all over the country.

The portfolio has held up extremely well.

Of course we know delinquencies to speak of and the legacy portfolio which is again largely residential mortgages keeps improving every month every quarter.

We have better delinquency numbers, the delinquencies are dropping, severities are stable to improving I would say, and that portfolio's run off is slowing for all the right reasons.

Doug?

Thanks, Raj.

Just talking about the margin.

The margin percentage for the quarter remained very strong at 5.82%.

That's slightly higher than our projections at the beginning of the year that we guided people to.

We are seeing a couple things impact that.

Probably the biggest is our projections on our legacy commercial portfolio turned out to be very conservative and when we put our numbers together for the year even though that's small portion of the legacy assets, they're very high yielding and the yields on those are coming in stronger and maintaining our margin.

So previously we had guided people to a margin for the year of about 5.55%.

We look like we're going to be slightly higher than that for the year now, maybe 10 basis points higher as we sit here today.

In terms of dollars net interest income was $146 million for the quarter, slightly higher than $138 million in the first quarter, which we believe is very positive to have the net interest income dollars grow and it's a reflection of our ability to continue to grow the balance sheet and put good earning assets on the books.

Non-interest income the biggest impact there continues to be lower accretion on the FDIC indemnification asset.

We've talked about that before as our legacy loans have performed better.

That means we'll get less cash from the FDIC and that affects that accretion.

Non-interest expense the biggest item there are numbers are benefiting in terms of being lower because of lower OREO and foreclosure costs.

As Raj mention the legacy portfolio is performing better.

So there are less units going into foreclosure and into OREO and as we sold the OREO properties we're actually realizing better lower losses and bigger gains when we sell the properties.

So that's impacting all those numbers.

In terms of capital our capital levels remain very, very strong as you can see from the press release with Tier 1 the leverage ratio at 12.8% and both risk-based capital numbers in excess of 30%.

In terms of the impact of the MPR's recently published, these numbers are estimates in the sense that we're still going through the impact, especially risk weighted asset side, on our investment portfolio and our residential portfolio, but as we sit here today, if this was fully implemented, the Tier 1 capital ratio and the total capital ratio would both exceed 25% and probably even more importantly the new common equity Tier 1 ratio would exceed 24%.

So our capital position remains very, very strong and we believe as we move forward here, should there be some opportunities for us to do some things, our capital position should give us an advantage over some of our competitors.

John, back to you.

Thank you, Doug.

And that would be a full implementation as if it were the end of the period?

Correct.

Before I turn it over to questions, and I know there will be some about New York, and obviously we're anxious to answer those questions, but let me just reframe for you how the settlement with Capital One worked and what the mechanism is and how it affects us going forward.

And I know it's got plenty of publicity and many of you read it but it is a little confusing.

So the settlement is as follows.

John Bohlsen and I wrote a $20 million check to Capital One.

That was personally the most painful part of our settlement, and secondly the old non-compete that we were under does expire on August 7th as it was intended to do and a new non-compete was created for the stump period between August 8th and the end of January actually terminates on February 1st.

Under the old agreement we couldn't do any business in New York at all.

Under the new agreement we can do all the business in New York that we want to beginning in August provided that we do not take any business away from Capital One, that we do not solicit or hire any of Capital One employees, that we continue to manage Herald as a unique and separate subsidiary of the holding company managed by Raj, and we can't open our branches which are under construction until February 1st.

So we will begin to do business in New York for the balance of the year although it will be muted slightly until we can open the branches and move forward full force in hiring all of the teams that we expect to hire in New York City.

I also am hopeful, and I know Raj mentioned to you, that our margin is coming down quite quickly, or rather our deposit cost is coming down rather quickly.

As a [thrift?] which this has been until we got this order, this is on the lower end of the deposit costs for [thrift?] but it's on the higher end of the deposit cost if it were complete a commercial bank.

We think this will be helped a lot by New York because we expect that a lot of liability growth that we will get in New York will come in the form of interest free commercial demand deposits so we're looking forward to a continuation of that trends of cheaper deposits costs which gives us even more room to protect margin going forward.

That being said I guess we're ready to take questions.

(Operator Instructions).

Your first question comes from the line of Robert Placet from Deutsche Bank.

Please proceed.

Hi.

Good morning.

Just first question as it relates to your outlook for new loan growth.

I believe your previous expectations were for I guess $2 billion on a year-end basis give or take.

Now that you're roughly over 50% of that already in the trends you're seeing down in Florida, it seams like you guys should be able to improve off of that.

Just any thoughts on outlook from here?

I'm not sure that we're ready to say that in Florida alone that the growth would exceed that number.

We're still pretty comfortable with that kind of an estimate of loan growth.

We don't know the impact of the continued improvement of the south Florida economy.

We don't know how strong it's going to be and I wouldn't be ready to raise it.

Remember that in a balance sheet $2 billion worth of loan growth is a hefty growth and we're being very, very cautious on the back side of this as you heard me say before the first people we hired when go to Florida were credit people because we understood that we would be hit with a lot of volume in this area and so we're trying to be delicately careful here as we go forward.

We could certainly do a lot more business if we wanted to bring down our credit standards but we certainly have no intention of doing that.

Or our pricing standard.

Okay.

Great.

And then just as we look at your fee income obviously you saw a decline this quarter mostly related to income from covered assets but as you think about your core fee income going forward I was wondering if you could just speak generally about how you're thinking about growing the income over time and what kind of revenue mix do you see having between net interest income and fee income over the longer-term?

As we continue to develop the commercial banking business and especially in New York, we expect to see a significant growth in fees generated from treasury management, and cash management products that are very desirable and we are very competitive with here in New York.

So we expect to see a continuation of a trend of increased fee income, but this is never going to be a fee income driven institution.

This is a spread bank and while we are certainly hopeful and are always looking for opportunities to grow fee income, it's simply not a part of our strategic plan going forward.

We have looked at all of the obvious things that other banks have looked at that provide fee income opportunities and while it's entirely possible that we'll find one we are really not overly optimistic that we will turn something like that up.

Okay.

Thanks very much.

Thank you.

Your next question comes from the line of Brady Gailey from KBW.

Please proceed.

Hey.

Good morning guys.

Morning.

I wanted to dive into the margin a little bit with Doug.

So, Doug, the new guidance is 565 for this year.

If you run the math, that backs into a margin in the back half of this year of about 540 which just seams really low compared to where you're running now so I guess if you could just confirm that and then maybe offer some guidance for what you think the margin is going to do next year.

Brady, you know, as we have talked before, projecting our margin can be a little bit difficult because of a couple factors that can cause some volatility.

One of which, as I mentioned before, we're probably a little conservative on the commercial portion of the legacy portfolio and we've also talked about before is we have one large residential pool that's carried basically at zero.

So any cash flow from that pool goes into the margin and that can cause some volatility.

So, as I sit here today, the 565 I feel very comfortable with.

Could be it higher?

Yes, it could.

But I tend to be hopefully a little conservative on these things so I would stick with those numbers.

And next year, again, as we project out, we do project our margin to go down.

Similar to what we have talked about before in terms of magnitude probably, as I sit here today, in the neighborhood of 70 basis points to 80 basis points, something like that.

And again, that's simply a function of putting on a lot of new assets at much lower yields than the legacy assets that will run off.

Obviously we'll be able to have some impact on that with driving down our funding costs, but we still believe the margin will go down next year.

Okay.

Great.

And then another one for John.

John, as a function of your new non-compete with Capital One, which I guess you flip from the old to the new here in a couple weeks, do you have the ability to announce a New York acquisition but not close it until I think sometime early next year.

There is a lot of speculation on whether you're going to grow organically or via acquisition.

I guess if you could just provide a little color on if you did elect to grow through deals, what sort of deals are you interested in?

I mean are you going to go the thrift route like you did at North Fork?

And a comment on size and would you do a deal as large as say in Astoria?

Spoken like a guy who owns Astoria over there.

You're right and I should have mentioned it.

The other important part of our new deal with Capital One is that we could negotiate and announce an acquisition anywhere in the United States including New York, New Jersey, and Connecticut any time after August 7th.

So we're free to make acquisitions.

We simply can't close on an acquisition before February 1st of 2013 and frankly in today's regulatory environment that wouldn't be possible any way.

So we are examining possibilities of doing that.

Now, with regard to our strategy there, we're looking at all of the obvious candidates in the northeast.

Many banks are under tremendous pressure on the margin line.

You are starting to see numbers even getting below 2%.

We think that those institutions will be forced to do something strategic one of these days.

However, we don't think pricing is right there yet.

We think that unfortunately there seems to be very little good news in the future for those kind of banks and thrifts.

So we don't have any targets in mind.

I will tell you, and we found this to be the case in Florida as well, the idea of thinking about doing very small institutions is very unattractive today owing to the restrictions on the regulatory side, the transaction costs of getting small deals done makes them very unattractive.

So we do think about larger institutions more than we think about, that would be institutions of $5 billion and greater, rather than under $5 billion although that's not to say we couldn't get attracted to a smaller institution but it would have to make a lot of strategic sense as well as financial sense.

So we don't have anything particular in mind, but we are watching very carefully the performance of a number of institutions in the northeast and look, everybody is talking about this, right?

This is the biggest subject in banking today is consolidation and everybody is amazed that it hasn't come to pass yet, but I believe that there will be an inflection point some place in the future when there will be a massive amount of consolidation in this industry, particularly in banks in that mid-tier category and we certainly expect to be a player.

Okay.

And then lastly a quick one.

Private equity, I think your top four guys own over half the stock, they roll off of lock up restriction, I think sometime in the next couple days maybe July 28th.

Is that something that you're nervous about from a stock price point of view?

No.

Actually we already brought that up.

Raj, you want to comment on that?

They rolled off their lock ups last year in July.

What they are rolling off this July is their ability to sell in the open market which they will obviously be limited under SEC rules on how much they can do.

Given the volume in our stock nobody is expecting for them to start selling 5,000 shares a day but they could have done a secondary anytime in the last twelve months and in the future also but they have chosen not to.

You know, because it's their call.

They have not approached us at all about trying to do a secondary.

Yes.

It's safe to say, and I am in touch obviously with these guys all the time, it's safe to say there's no interest in doing a secondary at these price levels.

Okay.

Great.

Thanks for the color, guys.

Thank you.

Your next question comes from the line of Ken Zerbe from Morgan Stanley.

Please proceed.

Sure.

Yes.

Ken Zerbe.

Question on the loan, sort of your average, loan yields that you're putting on today.

I know there is a lot of SEC noise now but if you were just taking an average of everything you're writing today where is that coming on at?

Around 375 for the quarter.

Okay.

And how is that trended over the last quarter or two?

Probably in the fourth quarter last year I believe it was low fours so it's come down a little bit.

Okay.

The other quick question I had was can you give a little more on the provision expense?

How should we be thinking about that in relation to the new loan originations that you're putting on?

Because it seams that loan growth is very strong, your provision expenses are low.

I know it only relates to the new loan originations but is this a good level if we were just to divide gross provision expense to gross new loan originations and keep that going forward?

Is that a fair assessment?

I would say yes, Ken.

You know, we talked a little bit about this before.

Right now we're in a position where because we're so new and we don't have our own loss history, we're actually using peer group loss history in terms ever booking the provision.

We believe, although we can't guarantee this, but we believe out in a year or two when we get to use our own loss history that provision level may in fact be lower, but for right now.

for the foreseeable future I think what you just described is a good way to look at it.

Alright.

Great.

Thanks.

Thank you.

Your next question comes from the line of Herman Chan of Wells Fargo Securities.

Please proceed.

Thanks.

It appears that some of the larger competitors in the Florida markets are on the mend.

John, how would you characterize the competitive landscape at this point maybe relative to a year ago?

Well, it's about the same, Ken.

We're seeing certain banks competing in certain asset categories.

When we get up to loans that are $30 million, $40 million we see [PD?] a lot and they're good competitors in that space.

In the smaller loans below that space we see BB&T occasionally and the small banks, unfortunately, continue to weaken further in Florida and there's relatively no competition from them any more.

We see JPMorgan once in awhile in sort of the commodity product very small end, small business loans $50,000 to $100,000 when they do specials here and there.

We don't do Wells Fargo much at all.

So I would say it's about the same.

Great.

And in terms of your hiring strategy in New York you mentioned you couldn't take some Capital One employees but I wanted to get your thoughts on the hiring process how that the new non-compete is extended.

Yes.

Well, we're in touch with obviously we're in touch with lots of people in New York who would like to join with us.

We're not in touch with any Capital One employees now, but we will be able to start that conversation after January and so we expect to slowly start gearing up for New York beginning on August 8th and then you could expect that to accelerate after the turn of the year.

Great.

Thanks a lot.

And we have three branches opening there, we have three branches under construction, 37th and 6th, 48th and Park, and 57th and Lexington.

And then we have Herald which will merge into BankUnited sometime in the first quarter.

So, essentially it's four branches but it won't be typical branch.

They're larger branches for us because we expect to do an inordinate amount of business out of those branches.

And so while we need to hire staff, it doesn't number in hundreds in New York.

To fully staff up all four locations in terms of adding to the staff that we already have at Herald is probably 50 or 60 people right now so it's not huge.

Great.

Thank you.

Thank you.

Your next question comes from the line of Erika Penala Bank of America.

Please proceed.

Hi.

Good morning guys.

It's Russell Gunther on for Erica.

Hey Russell.

Hey, guys.

Just quick question on the commercial growth.

You know, understanding the lock up coming off in the next couple of weeks do you have any updated thoughts on what you might be able to contribute on an organic basis in New York in 2012 and then how this might ramp up in 2013 with the branches open and ability to hire?

Me personally, I know, and I know what I think we're going to but I'm not ready to make that a public announcement yet because it's obviously conditioned upon a number of things happening, but, Doug, you have a comment?

For 2012, Russell, we don't have a whole lot in there for New York.

Given the settlement with Capital One, and even though we can do some business, I think it's safe to say we're going to be very careful until we get to the end of January next year and then we will go full bore so not much in 2012 and once we get up and running in 2013 I think we've talked in the past how we think that within two to three quarters of getting ramped up that we can be producing the type of growth on a quarterly basis that we're doing in Florida, which took us basically two years to get do this level.

So that's what we said publicly and, John, at this point I don't see any reason to change that.

Yes.

I agree.

Alright.

Guys.

Thanks a lot.

That's helpful.

My other questions were asked and answered.

Thank you.

Thank you.

(Operator Instructions).

Okay.

We have a further question and it's from Joseph Fenech from Sandler O'Neill.

Your line is now live.

Please proceed.

Good morning.

Question for Doug.

Doug, the re-classifications from non-accredable difference to accredable yield that been the wild card here in forecasting the margin.

You talked about the legacy commercial portfolio yields, being better.

Does the updated margin guidance that you guys provided include an estimate of potential further reclassification or is that sort of excluded and its kind of a bonus when it does happen?

That's a bonus when it does happen at this point.

We've been saying consistently for the last year that we expected those re-classes to drop.

They were very significant in 2009 and 2010 and so far this year the re-classifications is $50 million and we really don't have any re-classifications building going forward so to the extent that happens that would be an addition to the margin.

Okay.

And then, John, just on the New York expansion.

First, I know you said in the past that your organic growth strategy is going to be centered in Manhattan but would you look at doing stuff outside of the city in terms of new offices or what have you or is the organic strategy from the stand point of branch presence strictly relegated to Manhattan?

Well, we've couple of location on Long Island.

You know, we're going to have one in Melville, which is where we have a holding company office right now and probably one or two other locations on Long Island since that's sort of the home of where we started and we expect to do a fair amount of business out of there but nothing significant.

That's not to say that if an institution were to become available and it met our targets financially and strategically that we couldn't end up being with something of a franchise on Long Island or Westchester but we haven't seen it yet.

Okay.

So that's where I was going with that question was so you could do a deal on Longs Island as sort of a compliment to the organic strategy in Manhattan.

That's right.

Okay.

And then lastly, John, in terms of acquisitions in Florida.

You've said in the past that you've looked at a lot of stuff down there.

If the price were right, would you still consider doing something in Florida or with your preference for larger deals in New York, does that mean that you've kind of turned away from Florida so much as to keep as much dry powder as possible for a larger deal up here or is Florida and the South East still on the table?

Florida is very much on the table but I think I need to remind you that Florida has got 230, 240 banks and they're generally very small institutions so there are only a handful of institutions in Florida who are really big enough to be attractive to us and we are very interested in those institutions and continue to watch them carefully and would be very interested in adding them to our Florida franchise, but to be frank with you not at the price levels that we see.

So we just don't see the opportunity there.

It's obvious, right?

I mean, we're the largest bank in Florida except for EverBank which is a different animal.

So there's not a great deal of opportunity to do anything meaningful there, but if something were to come along, we would be a player.

Okay.

Thank you.

Thank you for your questions.

I would now like to turn the call over to John Kanas for closing remarks.

Yes.

Just in closing we are delighted with this performance and taking you back to when we went public a year and a half ago we did not expect Florida to improve this much this fast.

We thought it would be two or three more years before we would see this kind of stabilization so we are getting a real bonus out of the south Florida market.

Our lenders have done a tremendous job.

Remember, we hired about 150 new people last year in the loan side alone that have really now beginning to ramp up and crank in this new business and as we get new business we get more new business in Florida.

We just couldn't be happier with the way that's going.

We have a lot of room in the cost of deposit side which we expect will help to mitigate margin pressure in the future.

We are obviously very excited about getting into New York and while it is to some degree a wild card in terms of how quickly it will grow you probably know and can sense if you talk to me individually, that I'm very excited about New York.

I think it's going to be a big deal for us to be frank with you.

We are very optimistic about the balance of the year and expect to continue this kind of performance.

Now, that's all the good stuff.

The bad stuff is the macro-economic environment and nobody knows where we're going, but the feds seems to have promised us very low interest rates for a very long period of time which is going to continue to put margin pressure on the industry.

While it hurts us it hurts us a lot less than it does any of the target institutions that we think will have to sell in this environment because of the protection that we have from our loss share agreement.

So we can sit here for a long time and take a few punches from low margin while we think others around us won't be in as advantageous a position as we are.

So we would like to look forward to a time when interest rates in the market move up because the economy in the US is robust, but I must say that I'm not optimistic that we're going to see that any time soon and we don't count on that in our prognostications for BankUnited.

Short of that we sit here with a lot of earnings, a lot of capital, a lot of excess capacity in human beings and technology and waiting for the right opportunity to do something smart.

Thank you very much for your attention and for your interest in the Company and look forward to seeing you individually over the next few weeks.

Thanks very much.

Thank you for your participation today and this conference call.

This concludes the presentation you may now disconnect.

Good day.