BankUnited Inc (BKU) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the BankUnited fourth-quarter earnings call.

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

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

We will conduct a question-and-answer session towards the end of the conference.

(Operator instructions).

As a reminder, this call is being recorded for replay purposes.

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

Please proceed, ma'am.

Good morning and welcome.

It is my pleasure to introduce John Kanas, BankUnited's Chairman, President and CEO.

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

The Company generally identifies forward-looking statements by terminology such as outlook, believes, expects, potential, continues, may, will, could, should, seeks, 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 subsidiaries or in 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 relating to the Company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity.

If one or more of these or 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 factors should not be construed as exhaustive.

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, 2012, available at the SEC's website, www.sec.gov.

Now I will turn it over to John.

John?

Do you have that memorized?

I do.

Good morning, everybody.

Well, clearly, we are pleased and we are anxious to talk with you a little this morning.

The quarter was extraordinary and it topped off an extraordinary year for us.

I am going to speak to you only briefly about the high points as I see them looking back over 2012.

A couple of comments about the future.

And with me is Doug and Leslie and Raj and John Bohlsen.

And between us, we will answer any questions that you have.

The quarter was driven by principally three things.

Obviously, the better results in the sale of loans than we had been accustomed to in the past had a big impact on -- had an impact on the quarter, a pretty big impact on the quarter and on the net interest margin.

Doug will be happy to fill you in on the details of that.

I remind you, in past years, we had always sustained a significant loss in the sale of these assets in the fourth quarter and that we could see that, as the economy is improving, we are getting a lot more action in these [auctions].

You can see that we got almost 40% of the UPB on these loans this time compared to the less than 30% in the three years before, an average of the 30 -- less than 30% in the three years before.

So we expect that those kind of numbers will continue as the underlying economy continues to harden.

New loan growth is obviously a big driver of -- and a marker for the success of our strategy down here in Florida.

Including the loans we purchased, the annualized growth rate of loans on the quarter is 55%.

We continue to see improvement in that area and we continue to gain market share on our competitors down here in Florida.

A year ago, if you would have asked us -- would have asked me where the loan growth was coming from, I would have said essentially 100% of it was coming from pirating away market share from competitor banks.

We are now beginning to see -- and it is really two quarters old -- we are beginning to see a noticeable improvement in the South Florida economy, which is contributing to that loan growth as well.

If I had to guess, I would say it is still 75% market share gain, but 25% of it is coming from a growing economy here, particularly in South Florida.

We opened seven -- we opened nine new branches this year, are almost done with our expansion in physical branches in Florida.

We have got seven to go this year ahead of us but only one will be a new location.

Six of them are cleanups of old branches.

We obviously did some rearranging of the balance sheet, which Doug and Leslie will talk about, having extinguished over $0.5 billion worth of Federal Home Loan borrowings that -- and terminating those that had a borrowing cost of almost 3.5%.

We are pleased to be able to do that for two reasons.

One is it made sense in today's interest-rate environment, but even more importantly, it has the impact of helping us out earnings-wise in 2013.

So, all in all, a spectacular quarter for us.

We feel good about the momentum that continues to build at BankUnited and we look forward with great enthusiasm.

We did find a way to return some capital this year by increasing our dividends by 24% to $0.21 a quarter.

You also should note that, as we predicted, the cost of deposits continues to decline although it is at BankUnited still high in comparison to the broader market of commercial banks at 73 basis points, which actually, net of hedge accounting, is truly 68 basis points.

But we still have a significant way to go in terms of reducing deposit costs if market interest rates continue to stay where they are on into 2013.

So we are poised for a good loan -- a good year ahead of us here in Florida.

I should remind you that Friday is February 1. It is the date that all of the encumbrances on John and I fall away with regard to our noncompete in New York.

We do expect this quarter to open three branches in Manhattan and one on Long Island and to begin expanding the franchise in New York.

We have hired a number of people already that are beginning to help us to lay out our strategy in New York.

And you should look forward to seeing press releases on those issues coming up in the next few weeks.

I will stop now and take any questions that you have.

(Operator Instructions).

Ken Zerbe.

It is Ken Zerbe from Morgan Stanley.

I guess the first question I had -- in terms of the loan sale on the loans that have the zero carrying value, can you just quantify how much actually relates just to that that actually fell to the bottom line?

I know that most of it went through the NII, but were there other components of that that went through the FDIC reimbursement line?

I am trying to get a sense of the geography and impact of that sale.

And then if you also don't mind, when you think about, over the course of 2013, should you pull from that same loan pool to offset additional losses over the course of the year?

This is Doug.

We have had several discussions about the accounting for this.

And I won't go into great detail here, but let me just emphasize that we expected a benefit in the margin for the fourth quarter from the loan sale.

And when we gave people guidance at the end of the third quarter, we expected the margin for the year to be in the 570s.

That was based on what we expected to get from the sale.

Obviously, as John mentioned, the prices that we got from the sale were significantly higher than we were projecting.

The proceeds from the sale of the loans in the delinquent pool, all of that goes through the margin.

So although we were projecting some benefit to the margin from that sale, the benefit to the margin was obviously much greater, which is why we did some of the other things we did to pay down debt and some other things.

The second part of your question, we think that bodes very well for 2013, should we decide to sell more loans out of that pool.

I mean we are very encouraged by the pricing.

And if the pricing stays at these levels or even increases, it is very beneficial to us.

So all of the proceeds go through the margin.

However, we still, because the loss from -- in terms of what we can expect, the reimbursements from the FDIC, that loss is calculated on UPB.

There was a benefit that went through the gain on FDIC asset line.

Long story short, that is what resulted in the impact in noninterest income of being basically breakeven, which is what we told people we thought it was going to be for the fourth quarter.

That does help.

Is there -- another question I had, when you think about the additional accretion, I guess you reclassified some of the non-accretable to accretable this quarter, a fair amount it looks like.

When you layer in that plus the FHLB repayment, do you guys have any guidance or thoughts in terms of net interest income for 2013?

Consistent with what we have always -- what we have said for the last three or four calls, we would expect our margin percentage to decrease in 2013.

However, as we sit here today, the advantage we have over other banks is because of the growth that we expect, we actually are projecting our net interest income dollars to increase in 2013.

So the margin percentage will go down consistent with what we have told you in the past.

But we expect more dollars which, frankly, I like to spend dollars.

I can't spend percentages.

Understood.

But we should see some of that increase in dollars offset through lower FDIC accretion, correct?

Correct.

And I think we have a statement in there that indicates that we expect the yield, the "yield" on the FDIC asset to turn negative next year.

So, you will see lower non-interest income as a result of that.

All right.

Thank you very much.

Robert Placet.

Good morning.

First question, in the past, you talked about commercial real estate being a smaller component of overall loans than you had expected.

Just given you are being a bit cautious in this area, any update on your appetite to grow CRE?

Yes.

This is John.

As the Florida market has improved, we are getting more and more comfortable with commercial real estate down here and in fact it is a growing component of our loan growth.

We will also be impacted significantly in that category as we move to New York because commercial real estate -- and by commercial real estate, that encompasses traditional commercial real estate and multi-family lending is expected to be a large part of our asset growth in the city, in New York City.

So the answer is more of it in Florida and certainly more of it coming out of New York.

Okay.

Great.

And then with the continued challenging rate environment, I was curious if you could just give your latest thoughts on any buildout of any fee businesses, whether it be a mortgage platform or what have you.

Over the past year, we have looked at any number of potential fee businesses.

Unfortunately, we haven't found anything that makes a great deal of sense, although Raj and John have been busy in the last month interviewing some people.

We -- I guess the short answer is we expect that we will do more residential mortgage loan origination out of this franchise this coming year, which will have an impact on fee income.

But there is no real -- we don't see a magic bullet here that anyone else hasn't already tried.

We have looked at all of the obvious categories that are associated with banking and don't think that there is anything magic here.

Thanks.

Brady Gailey.

Good morning.

So, when you look at loan growth, you are not fully back online in New York yet, but was there a lot of loan balances that were added in the quarter from the New York geography?

No.

None.

And last quarter I think --

By the way, to say that we are not fully online, we aren't not online at all in New York.

We haven't done anything there yet.

Okay.

And last year -- or last quarter, I think the new loan yield was around 365%.

Did that change a lot in 4Q?

The stuff that we put on weighted average was about right around 350%.

John, I remember talking on the 3Q conference call and you seemed a little more upbeat on the conversations you were having with potential targets as far as the bid ask tightening a little bit.

Can you just give us an update on how that has progressed over the last three months?

Or the last three years.

Those conversations continue and you have been reading about some companies that are actually coming to market to try to get sold in the near future.

We continue to have conversations with banks that are of interest to us, both in the Northeast and in the Southeast.

But to be frank with you, we have such a growth experience here in Florida and the results of our de novo expansion are so good that, frankly, everything we look at is more dilutive than any of us want to take on and introduces levels of risk into the Company that I don't think make any sense.

Having said all of that, I suspect that something will happen at some point.

It is clear that there are more incoming phone calls from people who would like to take part in a transaction and we have had more conversations this quarter, I guess, than we have had in the last couple of years.

But there's nothing burning out there.

And I don't -- while we have all walked around for the last couple of years predicting this massive consolidation in the banking industry, essentially nothing has happened.

And I really don't see -- unless regulators get a lot more ambitious, and I don't think they will, I don't really see the catalyst to getting people encouraged in this area except for their -- the uncertainty they have toward future earnings.

And we are dealing with a number of institutions who are at that juncture and know they have to go do something.

So I hate to keep saying this every quarter, but not yet.

And this is Doug's last conference call, right?

Yes.

Actually, I was going to mention that later.

Although we are going to get him back here to sit and help us get through conference calls.

But we are going to -- Doug has made a very meaningful contribution to this Company professionally and personally we are all going to miss him.

He's really become a very important part of our success story down here, and we send him back to South Carolina reluctantly.

But I can assure you he is going to be around a fair amount.

Leslie will take over as CFO at the end of February, beginning of March, but Doug will be around for the balance of the year to give us a hand and hopefully on into the future.

Well, Doug, it has been great working with you and good luck in life after BankUnited.

Thanks, Brady.

I appreciate that.

Herman Chan.

The 350% yield you are getting on new loans, how would you compare that to yields expected on the York loan portfolio once they become online?

From what we can tell, depending upon the mix of loans that we do in New York, there is not going to be a material difference in pricing in the New York market.

Florida is very, very competitive right now for obvious reasons, and so is New York and I think that our expectation is about the same.

Got it.

And you mentioned that you've put in place some people already in the New York operations.

Can you discuss some of the hiring activities that you guys have done prior to the expiration of a noncompete?

Thanks.

We are about to put out a press release I guess in the next couple of days.

The biggest hire or the most prominent hire that we have made is a gentleman who will head up our real estate lending activities in New York.

His name is Sam Giarrusso.

He was for -- 20 years with running the real estate lending division in New York for M&T Bank].

He was our biggest competitor at Northfork, so now he is -- we have got a new badge on Sam.

We are going to make an announcement -- I guess we just did.

We are going to make that announcement formally sometime in the next few days.

Sam has been well known to John and I for probably 30 years or more.

He is a very strong addition to our bank.

He knows the New York market like the back of his hand.

He knows every one of the borrowers and has had lots of experience with them all and can identify any location or physical location or any building in New York.

So Sam will make a very big contribution very quickly when you combine his market experience with that of John Bohlsen's and mine.

And Sam has brought two or three of his underlings with him who worked with him before in the York market.

And then we have hired some -- we've brought some of back-office folks from other institutions.

Obviously, no one has been hired from Capital One and we are beginning -- actually we are hopeful to open our Melville office in a few days, which will be the first office -- and have a soft opening up there to get things organized.

And then move on with the new staff to open Manhattan in the next few weeks.

Great.

Thank you.

Gerard Cassidy.

Can you guys give us some color on the unwinding of the hedge that you did, what the thinking was behind it?

Sure.

It's Doug.

As I mentioned previously, we had better than expected results from the loan sale and so we took a look and we decided we had some longer-term FHLB advances that went out to 2014 and 2015 at high rates in today's environment.

And we also had several swap transactions out there.

We decided to terminate one of those swaps, pay off the longer-term advances.

All that stuff had a combined borrowing cost of roughly 3.5%.

And we decided to do that because it positions us for 2013 and beyond.

And if in fact we feel we need to replace that longer-term funding, we have a significant amount of Federal Home Loan Bank advances maturing in 2013.

So we believe, when they mature, that we will be able to look at those and probably extend them out for a fairly long period of time in an environment where costs are historically low.

So that was the thinking behind that.

You shouldn't be left with the impression that we've decided to go all short on borrowing.

Quite the contrary actually because it is our belief that, at some point here, maybe this year, that we are going to see interest rates move up in the marketplace.

And we think primarily about protecting the balance sheet in that environment.

So, as Doug said, we paid off borrowings.

It cost 3.5%.

To put on like duration today, what is it about 1%?

Even longer to ration that we paid off.

So from 3.5% down to 1%.

Very good.

The mortgage insurance income line was quite low this quarter.

Was there anything -- is it a seasonal issue?

Or no, there was some business that you just decided not to do in the fee revenue area?

No.

Most of that actually pertains to legacy, residential loans and as that portfolio is winding down, that income is winding down.

So nothing, not seasonal, not a decision on all our part, not to offer it or anything like that.

I see.

And then John, can you remind us?

Once New York gets up and running, you pointed out you guys did about $2 billion of loans in Florida this year.

What kind of run rate do you expect New York to kick in on your loan originations and when do you think you can reach that run rate?

What we said in the past and we still feel good about repeating is after we have been in New York for two full quarters, so let's say by the end of the third quarter of this year, we would be disappointed if the run rate of loan growth coming out of New York wasn't very similar to what we are seeing coming out of Florida.

Another way of saying we hope to double our run rate of loan growth.

Great.

And then finally, to come back to your comments on the funding costs on deposits, some of it I gather is legacy issues, but what is interesting is interest-bearing demand deposits at 56 basis points seems on the high side.

Have you guys been able to, because of the strength of your loan loss sharing agreement with the FDIC, been able to maybe use slightly higher rates to attract more customers?

But at the same time, you are making so much money from the loan-loss sharing agreement you are able to do that?

This is Raj.

We are playing with deposit levers on the bottom side and we -- there is still some legacy deposits which are very price sensitive and we are careful with them.

But those are being replaced with new commercial and small-business deposits.

So, we do expect that (inaudible) point to keep coming down.

It is already down this quarter.

But it is hard for me to say exactly what it will come down to and how fast.

But we do expect that number to come down and get more in line with the average for Florida banks.

A view into our strategy is the growth of demand deposits for the year.

Why we didn't do much for the fourth quarter because that tends to ebb and flow, but demand deposits grew by about 50% for the year and that is clearly our emphasis on the liability side as we grow loans.

I guess finally on that, John, what do you guys think demand deposits as a percentage of total deposits could reach, or what is a level you guys would be satisfied with?

Transaction deposits, there's no reason why it shouldn't be 30%.

And demand interest and I am not just [comparing] combined, I'm saying you should be 30% if not even better.

And we are not there yet.

So --

I think that is easily achievable over the next period.

Great.

Thank you very much.

Erika Penala.

Good morning.

It is Russell Gunther for Erika.

Appreciate the color on expectations for NII growth.

I was just wondering if you could give us a hand on expectations for the margins, given the unique dynamics to your NIM and the opportunities you see on the liability side.

Do you have a sense for how that could trend in 2013?

Well, I think we have been saying for the last couple of calls as we looked out that we would expect it to be roughly 70 basis points lower year of 2013 compared to year of 2012 on a margin percentage basis.

And as we sit here today, I think that is still a pretty good approximation.

Just off a higher-base NIM than maybe some of us were looking for given (multiple speakers).

Actually, I should have said that myself.

Thanks for pointing that out.

We are starting from a much higher base than we had expected to be.

We expected to start from a base of 570, give or take, and we are starting from a base of 604.

So it is better that we would have projected on last quarter's call.

Okay.

Great.

I appreciate that.

And then on the expenses, given you mentioned the hirings that you've done, some more announcements to make, branches opening in the first quarter.

Has that investment already been reflected in the 4Q run rate or what could we expect on the expense side going forward?

Well, a certain amount of the expenses are in the fourth quarter.

These branches that haven't opened yet, we do have leases and we've picked up a fair amount of that in the fourth quarter.

Obviously, people costs are not in the fourth-quarter run rate.

We didn't -- anybody we hired in New York was very recent, so that's not in the fourth-quarter run rate.

Cutting through, Russell, as we look at next year, we expect our non-interest expenses to go up a little bit.

Occupancy and people costs, all the other non-interest expenses, they will be pluses or minuses, but they are basically flat.

Great.

That helped.

And then last question, just how we should be thinking about the provision expense going forward, given expectations for loan growth to really accelerate here in the back half?

I guess where are you providing for new originations and expectations for that going forward?

Yes that is a good question because probably our provision for the fourth quarter was lower than what you might have had in your model.

We have been saying all along that we are providing at this point based on loss factors from a peer group of institutions because, as a new institution ourselves, we don't have enough of our own loss history.

And we have been saying that we expected over time that the provision would go down as we started to migrate to our own loss factor.

We haven't migrated yet.

But what we saw in the fourth quarter was those loss rates for the peer group went down.

It's -- unfortunately, it is a little hard for me to predict what those loss rates might do, but if they stay at these levels, then we are going to have significant growth, but our provision probably will be a tad lower than what you have in your models if you have got your growth numbers right.

But, again, that is as we sit here today, and there could be some volatility in those peer group loss factors.

Understood.

Thanks for the color.

Appreciate it.

Joe Fenech.

Good morning.

First, I wanted to echo Brady's comments wishing Doug well.

It has been good working with you Doug and looking forward to working with Leslie also.

My question is is there any way for you guys to segment out for us as best you can what you think the contribution from what I will call the traditional bank was in the quarter?

In other words, the bank you have been building, ex all the noise, and then what the trajectory of the growth in earnings in the traditional bank has been over, say, the past year or so.

And if you haven't gone through that exercise per se, maybe just help us out a little bit conceptually with some of the components or how you think about it.

In other words (inaudible) ex all the noise, things like that.

And then in rough terms what you think that trajectory can be, say, end of this year to next year.

That is a question that we have been asked for the last couple of years, and we have consistently said and I am going to say it again, that to try and pull that apart we think is a not impossible exercise, but kind of a fruitless exercise because it is all tied together.

We service these legacy loans.

We have servicing costs associated with those.

So we don't do that.

This is our business model and this is what we do.

So, if you are talking long-term, we have said that we would expect our margin will start to get closer to what other banks are, but I can sit here and tell you today that if we look out three years, we still expect, as we sit here today, not having a crystal ball to what rates will do, we still expect our margin to be over 4%.

And as we get out two or three years, it starts to stabilize.

So maybe that is the best way to look at it in terms of what the long-term core business could be because, obviously, the impact of the legacy stuff will get less and less each year.

Okay.

Fair enough.

I guess just conceptually, if you were to say, okay, when do we expect the traditional bank to overtake the earnings from the loss share -- I know that is really hard to pick apart, but just conceptually, is that something you think about at all?

Like, say, by 2015 the traditional bank will be 51% of the earnings stream.

Or not do that preciseness but just conceptually, is there any way to pinpoint when you expect to cross that threshold?

Not exactly.

But I would say if you said to me, geez, do you think by 2015 the traditional bank earnings will have surpassed the legacy question mark I would say yes.

All right.

Fair enough.

Thank you.

And so much of that is a function of the underlying economy, interest rates in the marketplace, our success in growth in New York, and anything that may come along that is of the nature of inorganic growth.

So, we try not to spend too much time thinking about that, but rather thinking about putting one good quarter ahead of -- in front of the next.

[Michael Rosato].

Good morning.

On the cover loan sales -- and I apologize if you have already answered this -- but are you going to start selling loans on a quarterly basis or should we expect maybe a large loan sale in 4Q 2013?

We didn't talk about it today.

We talked about it probably last quarter.

So it is still a valid question.

Yes, we are still evaluating that.

Our concern is if we wait and do it all in the fourth quarter, it makes it very hard for you folks, frankly, to analyze us and really follow us.

So, our thinking is that we are going to evaluate doing that several times throughout the year.

Okay.

And then on -- this is a follow-up to the maturing FHLB advances throughout the year.

I don't know if you can provide any detail on the amount coming due in the first and second quarter.

We have just under $700 million maturing in the first quarter and another roughly $350 million throughout the rest of the year.

And not all of that $680 million is at a very high cost.

I don't want you to get the impression that, if we extend that, we are going to see a huge benefit from a pure cost basis, but what it would allow us to do is extend the liability side of our balance sheet at a very favorable rate.

Great.

You guys answered the rest of my questions already.

Appreciate it.

Sir, I have no questions at this time.

(Operator instructions).

Hearing none, I want to thank you all for calling in this morning.

Thank you for the interest in our Company.

We are obviously very excited about the upcoming year for a number of reasons and the results of this year certainly getting us on a strong -- to a strong head start going into whatever may come in 2013.

We are encouraged, I will repeat, that we are encouraged greatly by what we're seeing here in the South Florida market and in the overall market in the United States and think that that is going to bode well for us and other institutions into the future.

So thank you again.

Look forward to talking to you in 90 days.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Thank you, and have a good day.