BankUnited Inc (BKU) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 BankUnited, Inc.

Earnings Conference Call.

My name is Crystal, and I will be your operator for today.

At this time, all participants are in listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Miss Mary Harris, Senior Vice President of Marketing and Public Relations.

Please proceed.

Good morning, and welcome.

It's my pleasure to introduce John A.

Kanas, our Chairman, President, and Chief Executive Officer.

But first, I'd like to remind everyone that this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to, among other things, future events in financial performance.

We generally identify forward-looking statements by terminology such as outlook, believe, expect, potential, continue, may, will, could, should, seeks, approximately, predicts, intends, plans, estimates, anticipates, or the negative version of these words or other comparable words.

Any forward-looking statements contained in this call based on the historical performance of us and our subsidiaries or on our current plans, estimates and expectations.

This inclusion of the forward-looking information should not be regarded as representation by us that the future plans, estimates, or expectations contemplated by us will be achieved.

Such forward-looking statements are subject to various risks and uncertainties, and assumptions relating to our operations, financial results, financial conditions, business prospects, growth strategy, and liquidity.

If one or more of these other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in this call.

These factors should not be construed as exhaustive.

We do 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.

John?

Good morning.

It's been a while since I've done one of these, so it's nice to be back on the air, talking about the quarterly report of BankUnited.

I'm going to -- just for the record, owing to the wonders of technology, we have a number of people in the room.

And actually, have Raj with us as well, but he's in New York.

So Doug Pauls is with me.

I'll turn over my comments to him in a few minutes, and he'll go into more detail.

John Bohlsen is here with me in Florida.

And Raj Singh is here with us.

Although he's in New York today, he's here to answer any questions that you might have.

So, let me give an overview.

We've been around to see many of you lately, and we've talked about some of the subjects that now are materializing in front of you in the form of this quarterly report.

We are particularly pleased, even though we told you that we expected to see significant velocity of loan growth picking up later this year.

And you can see that on an annualized growth rate, actually loans are up 134%.

We've seen non-covered loans go up by over $350 million this quarter.

And I've talked to many of you individually and some new groups as to how this is happening.

The teams that we're hiring in Florida are beginning to take hold.

And the business that those people are bringing to us is getting onto the books every day and our deposit -- our market share continues to grow.

A lot of you asked me, when we were traveling, when will you start growing enough to stop shrinking?

Another way of saying, when will loans actually start to net grow?

And you can see that on a year-to-date basis so far this year, we've only shrunk about $100 million.

I think we've shrunk from $3.9 billion to $3.8 billion in loans for six months.

However, if you look into the quarter, you will see that in the second quarter this year, we actually grew loans by about $70 million.

We had about $232 million worth of shrinkage in the covered portfolio, and we booked about $302 million worth of new loans.

So in the quarter itself, we had net growth of loans of $69.9 million.

Now that -- when I was answering that question on the road with many of you, I said that, in our hearts, we believed that this trend would begin to materialize toward the end of 2012.

What's happening is two things.

One, we're able to sign on more teams than we had expected to.

And also, there is a very slight uptick in the Florida economy, some of it being witnessed by some of the housing stats that came out yesterday, although most of us believe that those are seasonal.

But we are seeing encouragement here.

And we -- and John will tell you, if you ask him, that we're off to a very strong start again for the third quarter in loan growth.

So, we expect that to continue to ramp up.

Also, core deposits, which is something that we've talked a lot about on the road.

You know, we spend our life driving expensive CDs out of the bank and mining the Florida market for core deposits.

And core deposits, even this quarter, non-interest bearing demand deposits are up 45%.

And core deposit growth itself has grown at an annual rate of 19%.

So we are both asset classes -- both the asset class and the liability class that are the most important to us, and that are the focal point of our business strategy, are growing nicely.

Book value, obviously, has enjoyed a nice move as a result of this over $15 for book value and almost $14.50 are tangible.

The basis that we are very pleased with that.

Earnings are about where we expected earnings to be.

I hesitate to remind you all, for those of you who cover earnings and cover this company, while of course earnings are important to us, and current earnings are important to us at BU, because they continue to build the value of our company.

We are less focused on current earnings than we are building a strategically important bank here in Florida.

And pennies one way or the other in the earnings line are much less important to me than the trajectory of growth of the assets and liabilities that we are focusing on.

I have told many of you the story of how we actually have hedged this balance sheet tremendously again rising interest rates, and are probably punishing ourselves -- we are punishing our earnings, for tens of millions of dollars, but we're guarding against a sudden and unexpected rise in rates.

None of us expect that, and obviously so far that has cost us money.

But we will continue to do things that will protect the Company against those type of movements.

And we will continue to spend as much as we can, reasonably, of our current earnings to build out these teams in Florida, particularly as we keep seeing small amounts of evidence that the Florida market, at least in some areas, is improving.

There's a good article in today's Miami Herald, Home Prices Rise Slightly in South Florida.

Unfortunately, I think that most of us believe that's seasonal.

But as an example, in June, there were 5,000 homes and condos traded in Miami, Dade, and Broward counties.

That's the good news.

The bad news is, 60% of those sales were foreclosures and short sales.

But there is a robust market.

Prices have stabilized in many of these markets, and we're getting a little bit more excited about the Florida economy than we were some time ago.

I really have nothing further to say, other then, before you ask the question about the lawsuits, let me bring it up.

We made a comment to the press, and let me try to paraphrase it.

We said that John and I are well aware of our obligations and under our non-compete agreement.

We, under the advice of counsel, have operated under that agreement for many years.

We are in compliance with it, according to our sales and courting to our counsel, and we continue to be in compliance with it.

We have obviously engaged counsel to look at this issue, and then we've engaged other counsel and other counsel and other counsel to look at this issue.

And we continue to believe very firmly that the results of this case will have no bearing on our expansion plans in New York or anywhere else.

So obviously, I'm not going to get into details of a lawsuit, but I know it's something of interest, and I don't want to duck the subject.

I think that's about it for me, I'm going to kick it over to Doug, who'll give you a couple of minutes about some more detail.

Thanks, John, and good morning, everyone.

I would just like to touch briefly on the financial highlights of the quarter as reflected in the press release.

We reported net income of $44 million and EPS of $0.44 per share, which is in line with consensus.

As John mentioned, there was very strong loan growth for the quarter, over $300 million of growth in non-covered loans.

And this growth keeps us on track to meet our previous loan growth targets that we shared with many of you when we were on the road for 2011.

We continue to transform our deposit base with quarter-positive growth of the $145 million for the quarter.

And as John said, when you look at year-to-date core deposits have grown at an annualized rate of almost 20%, which we're very pleased with.

Asset quality remains very strong, with non-performing loans to total loans of 90 basis points.

The vast majority of non-performing loans are covered loans.

In anticipation of being ask the question, I did want to point out that our provision for loan losses for the quarter was impacted by a partial reversal of the allowance related to a pool of home equity loans, covered home equity loans, ACI loans.

We recorded significant allowances for this pool in the second half of 2010.

The projected cash flows for that pool have improved significantly over the last six months.

And we provided detail on a the roll-forward of the allowance in the press release, and you can see that that reversal comes through the ACI column.

And I think we've mentioned to you, again, on the road and when we've talked to you, that the provision is going to be -- can be somewhat lumpy given the accounting for covered loans and the ongoing projection of cash flows related to those loans.

Net interest income grew to $117 million for the quarter, which is a 22% increase over the same quarter from 2010.

As we've talked with you before, our net interest income in 2011 has benefited from significant re-classes, from non-accretable difference to accretable yield in 2010, and that's helped push our margin close to 6% for the quarter.

I think it was 5.99%, actually.

We have indicated previously that those re-classes will likely decline in 2011, and you can see that, again, in the detail in the press release.

And that will impact our margin percentage over the next several quarters, again, all in line with our previous guidance to you folks.

Non-interest income for the quarter reflected lower FDIC accretion and lower loan resolution income, again, in line with our previous guidance.

Increases in non-interest expense were primarily related to OREO impairment and related expenses and foreclosure expenses.

We expect these costs to remain elevated for the balance of 2011, although please keep in mind, we see an offsetting benefit to these expenses in non-interest income.

And, finally, we -- as you're all aware, I'm sure, on June 2, 2011, we announced a merger agreement with Herald, a $500 million bank in the New York metro area.

We expect this acquisition to close in late 2011, and Herald will serve to jumpstart our planned expansion in New York.

We are very encouraged by our second quarter results.

We continue to perform in line with our previous guidance, and we look forward to continued strong performance in 2011 and beyond.

And with that, I think John and John and Rag and I would be happy to respond to any questions.

(Operator Instructions)

Our first question comes from the line of Erika Penala with Bank of America, Merrill Lynch.

Good morning.

Hey, Erika.

How are you doing?

I'm doing well.

Could you remind us what your loan growth targets were for the balance of the year?

And also given John's comment that you were able to sign on more teams, if it's possible that growth could accelerate, at least on the commercial side, from what we saw in the second quarter?

Well, in terms of the targets, Erika, we have told everyone that we thought we could do between $500 million and $600 million of growth in the commercial portfolio, which includes commercial loans, commercial real estate, and leases.

And we thought we could do $125 million to $150 million of growth in the residential portfolio, and we've actually achieved that target on the residential side.

John, do you have any comments about potential growth in the second have with the new teams?

I mean, Erika, it's hard to say.

I mean, if the current quarter and the encouragement that we're getting from our lenders would lead us to believe that our growth assumptions as we went into the year might have been a little bit light.

So, do I personally believe that we'll do a little bit better than we had originally said?

Yes, I do.

But, markets come and go, and I wouldn't want to turn that into a promise.

But certainly, based on what we're seeing this quarter and based on the strong start that we're getting in the third quarter, and what we're seeing and hearing from our lenders, I think there's every reason to be optimistic.

Given the traction that you're getting in Florida with regards to your core deposit growth, do you expect to continue to purchase [maybe more] more the second volume that you did this quarter, given that -- putting it to work in the bond portfolio is just the yields are sort of terrible at this point?

Well, I think, Erica, what we'll continue to do is, you know, look at the best alternative for us to invest our cash.

And we, for this quarter, certainly felt that we saw some good opportunities to purchase residential loans, certainly at better yields, if you say, that the bond market is a bit tough right now.

So, we will continue to evaluate those alternatives.

I wouldn't be surprised if we continue to purchase residential loans.

I might just add that the portfolio of residential loans that we purchased is performing very well.

We have zero delinquencies, FICO scores that are 730 and above, LTVs below 70%.

So we're very happy with the quality of loans we've been able to purchase, and will probably continue looking down that path.

And then, I just had one last question.

John, I understand that your ability to comment on current legal proceedings is very limited.

But wouldn't all this be moot by August of next year, anyway?

I'm not a lawyer, Erica.

But our agreement as drafted ends in August of next year.

Okay.

Thank you.

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

Great, thanks.

Hey, guys.

Just a quickie on the CapitalOne thing.

Have you guys estimated potential legal costs of fighting the dispute over the next year?

Well, Ken, again, it's a little tough for us to comment on something that's as far as -- I mean, not very far in the proceedings.

What I can say is, we do not expect those costs to have any type of material impact on our financial performance for the next year.

Okay, good.

And in terms of the FDIC costs, I understand that they are largely offsetting.

Would you have a net impact?

I mean, did it swing a penny are two up or down on the net basis?

I'm sorry, again, for which?

Oh, just all the FDIC-related costs, like the higher accretable yield with the reductions in the non-interest income and the OREO costs in their reduction -- or, their offsets.

Well, we've talked about this before in terms of the ups and downs.

Right?

And I think we're getting the accretion for a second.

You know, we've continually demonstrated that the resolutions and the offsets in general tend to have an immaterial impact.

I think the way I would answer that, Ken, is we're performing pretty much in line with the guidance that we gave folks starting late last year as we started the IPO process.

So, that's how I would answer that question rather than looking at a penny up or penny down.

Okay.

And then, just a very silly quick question.

Do you guys have your average diluted share count that you could provide to us?

Actually, that's not a silly question.

I did not find it in the release, and was hoping could provide that going forward.

Well, let me answer it this way.

And I'm going to go into a very minimal amount of detail here, and would be glad to talk about this offline with anyone who wants a lot more accounting technical jargon.

But because we have a couple of securities which are participating securities, we have to go through a different EPS calculation in coming up with basic EPS than you would expect.

And that calculation is a little convoluted, and we will provide a lot more detail on that calculation in the 10-Q.

We pulled the number of shares out of the press release because were concerned that people wouldn't be able to do the straight math, and it would be more confusing.

So I don't want to go into too much more detail just because, as I said, it's pretty technical accounting stuff.

But if you want to give me a call, I'll walk you through it.

Okay.

All right.

So you guys are going to provide just the end results, average shares outstanding?

When we file the 10-Q in a couple of weeks, Ken, we'll have a lot more detailed, and we'll walk through the actual EPS calculation.

We didn't include it in press release because frankly, the it's a little convoluted, and we frankly thought it would take away from the story which is, you know, strong performance and strong loan growth.

So give me a call, and I'll walk you through it.

All right.

Thank you.

Our next question is from the line of [Robert Placid] with Deutsche Bank.

Please proceed.

Hey.

Good morning, guys.

Good morning.

How are you?

Just the first question, just a follow-up on the non-compete.

So you remain confident you're not in violation.

But I guess ultimately, if you are found to have violated it, can you kind of help frame what exactly that means for BankUnited, and how big of an impact that would be for your business?

And that's one that my lawyers would, if they were sitting here, would stick a sock in my mouth if I tried to answer that question for you.

So, I mean, I really can't.

Okay.

That's fair.

Next question, just regarding a NIM, specifically, the accretable yield.

So, just to be clear, you expect the re-classes from non-accretable difference to accretable yield to slow from here.

Correct?

Oh, I think what we've said, and I think what you can see if you look at the roll-forward in the press release, is that we expect the re-classes for 2011 to be much lower than in 2010, and the first six months certainly bear that out.

Okay.

So as it relates to the accretion flowing through net interest income, it seems like it's been fairly consistent of about $100 million per quarter.

I guess going forward, shall we expect a similar run rate, and --?

I think the way I would answer that is to say -- and again, this is in line with what was said before -- these large re-classes in 2010 have helped push our margin up through the first six months of 2011.

Our margin is going to stay high the for the next several quarters, but we would expect it to start trickling down a bit as we invest in new assets which are lower yielding, these re-classes will have less impact going forward.

So we would expect the margin percentage to begin to decrease, again, in line with what we've talked about before with everybody.

Okay.

I appreciate the color.

And our final question comes from the line of Brad Gailey with KBW.

Please proceed.

Thanks, guys.

Good morning.

I wanted to ask about the average yield on that $300 million of loans originated.

Do you all know what that was?

Hey, Brady.

I wanted to ask about the average yield on that $300 million of loans originated.

Do you all know what that was?

Yes.

The commercial stuff that we're putting on is slightly above 450.

The residential stuff is high-3s to low-4s.

Okay.

And is that $300 million -- is that predominantly just stealing market share, or is there any true organic loan growth and added in that number?

No, that is -- this is John, Brad, I would say 90%, 95% or 98% taking market share from others.

You know, this is a strategy that we've employed since we got here.

We've hired teams of people who are veterans in the Florida market, and those people tend to bring us other people to come to work here, and they all bring their customers from other institutions, all of whom have had years of experience as borrowers.

And as Mark had said, we get to be thoroughly familiar with their credit history.

And, of course, we're thoroughly familiar with the lenders' credit performance and history.

So this is just a continuation, actually, and a bit of a ramping up of what we started when we first came here.

And, John, I know you guys hired a couple of decent-sized teams in the six months before you went public.

Can you give us an update and just quantify the amount of commercial lenders that you've hired over the last couple of quarters since going public?

I'd be guessing.

John, since -- I guess for this year?

Guess.

I would guess 50.

Probably something on the order of 50.

And all those are commercial lenders?

Yes, and there's support people around the commercial -- credit people (inaudible).

Small business, middle market.

Yes, small business, middle market, all the lenders.

Okay.

And then John, could you just give us an update on your outlook on acquisitions?

I know you talked about it a little bit during the road show, but, you know, on the FDIC front and the open bank deal similar to what you did with Harold National, can you just give us an update on your thoughts regarding expanding the company by acquisition?

Yes, as you know, and as I've told many of you, we are always engaged in dialogue with one or more institutions down here, either literally or on paper.

And we continue to examine all of the opportunities that are coming up here in Florida.

And you know that -- and you've heard me say that the FDIC deals are just not very attractive financially anymore, for any number of reasons, probably the most important is because they come with a tremendous amount of restrictions that would impede our business strategy at the host bank, not the least of which is the fact that you can't sell you bank for 10 years if you do a current FDIC deal.

And while we've engaged and continue to engage with people who would like to sell their banks and their banks are not going to fail but they're stumbling along, we just can't get our arms around asset marks.

We continue to ask and we're trying to be realistic here, and we're not trying to -- we understand that one could be too conservative in this regard.

But given the fact that Florida is where it is, and while it is probably quote-unquote in recovery, is going to be a long slug out.

We just can't -- we just can't get ourselves to meet the pricing for these companies as a result of the marks that many of them have on their assets.

Okay.

And then, finally, I think your stock's been a little under pressure due to the expiration of the 180-day lockup for some of your private equity investors.

You know, I think the time for PE guys still own a little over half of the Company.

Can you just remind us of the details as far as how much of that private equity ownership can be sold right now?

Is it all off of lockup, or is it just a portion of their investment off of lockup now?

Yes, Raj is our resident expert on that.

Raj, you want to answer?

Sure.

The private equity firms are locked up even now.

They'll be locked up for basically 18 months from the IPO date.

They cannot do open market sales.

They can -- they are freed up to do a secondary, if and when they choose to, but they can't just sell shares on the open market.

Okay.

So who rolled off restriction at this 180-day mark, or was there anybody?

It's a really small -- I mean, there was a couple of families who had put in a very small amount of money.

There are couple of employees who have $1 million worth of share here or there who put in money.

So, just them.

But the four of us, John, John, Doug and myself at the PE firms, we cannot sell on the open market.

Okay.

All right.

Great, guys.

Thank you.

That concludes question-and-answer session for today.

I would like to call turn the call back to Mary Harris for closing remarks.

Mary Harris; Thank you, everyone, for being part of the call.

We appreciate it.

Have a great day.

Ladies and gentlemen, that concludes today's conference.

Thank you so much for your participation.

You may now disconnect, and have a great day.