BankUnited Inc (BKU) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to BankUnited Incorporated 2013 second quarter earnings call.

My name is Sandra, and I'm your event operator today.

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

We will conduct a Q&A session towards the end of the conference.

(Operator Instructions)

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

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

Please go ahead.

Good morning.

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

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 that 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 versions 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 on the Company's current plans, estimates, and expectations.

The inclusion of this forward-looking information should not be regarded as 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 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.

Here's John.

Good morning, everybody.

Obviously, we're happy to report our second quarter results.

This is the first quarter that has been significantly impacted by our presence in New York and as we had anticipated, New York has begun to make a serious contribution to loan growth.

$0.52 a share for the quarter, a little better than the market had expected to see from us.

New loans grew at a pace of about $1.1 billion for the quarter.

That's broken up as follows.

That's about -- rounding here -- about $260 million out of New York, commercial out of New York, about $340 million out of commercial out of Florida, and then the remaining $450 million is a combination of our indirect lending platform, our leasing companies, and residential mortgages.

Deposits for the quarter have reached $9 billion with demand deposits now reaching 24% of total deposits, a target that we set for ourselves earlier this year.

Net interest margin, a little stronger than we had given you guidance on at about 6.14%.

We have really completed our current plans for build out in Manhattan by opening two additional banking centers in the second quarter, and that brings us now to four branch locations in Manhattan and one about halfway out Long Island on Route 110 in Melville.

Deposit costs continued to trend down, 64 basis points for the quarter, down from 70 in the prior quarter, and a significant gain in tangible book value to $18.43.

Deposit growth in New York all in is about $100 million so far this year.

Deposit growth tends to lag loan growth in these new initiatives since the loans go on the books right away and a lot of deposit relationships are fairly complicated and complex and it takes awhile to get them open and up and running, but we're well underway to seeing significantly more deposit growth come out of the New York market.

We talked to you last two quarters about the fact that New York, we viewed New York as a significant outlet to allow us to grow loans and to diversify our risk between South Florida and New York and that is exactly what's happened.

The result of that has been we've now gotten our loan-to-deposit ratio up to just about 75% from roughly 65% at the beginning of the year.

Loan quality, as you can see, has remained stellar for us.

We continue to work off the FDIC asset, although at a declining rate, and we are feeling very good about the fact that interest rates in the marketplace, while we believe are beginning to move and will continue to increase over the next year or two, the timing of that is perfect with our entry into the New York market.

I'd certainly rather be entering now at this stage in the interest rate cycle than six months ago before this was as predictable as it now seems to be.

So all in all, a quarter that we're very pleased with and a continuation of building strength in this balance sheet at a rather impressive growth trajectory centered around, I think, the two most vibrant markets possibly in the United States, but certainly on the East Coast, and that is Manhattan and Miami.

We're not surprised by the early growth that we've seen out of the Manhattan market and we won't be surprised by the growth we continue to get there for the balance of the year.

We are a little surprised about how quickly Florida, particularly South Florida, is recovering and how much more growth we're getting out of the Miami-Dade area than we had anticipated earlier this year.

For those of you who haven't visited in awhile, particularly to downtown Miami, where there were 30,000 or 40,000 empty condos four years ago, they're now full and we just drove up from there this morning, and there's probably 15 construction cranes that are rigged and busy and building new buildings along Brickell Avenue and then over onto the beach.

Happy times in South Florida.

While those happy times and those growth rates are not being felt all over Florida, certainly not in the north and not as much on the West Coast, the East Coast, and particularly South Florida, continues to recover at a very impressive rate.

I know that the most interesting part of these presentations is responding to your questions and so many of you have listened to me for enough years give these reports, I don't think you need to hear me talk any more.

So Leslie is here with me and so is Raj, so is Jeff Starr, Bank Counsel, and I think right now would be an appropriate time for us to start taking your questions.

(Operator Instructions)

Rob Placet from Deutsche Bank.

Hi, good morning.

First question as it relates to your outlook for new loan growth from here, the 2Q run rate was obviously very strong, at a $4.4 billion.

How should we be thinking about the pace of loan growth from here?

And has your outlook for the mix between New York and Florida changed at all?

We had said in the last quarter that we thought that after we were in New York for two full quarters that we could expect to see roughly the same amount of loan asset growth out of New York and those five locations as we do out of all of Florida.

And based on what we can see right now, looking forward, and I'm looking at Leslie, and you can give us the finer points of this, based on what we can see right now, we think that prognostication is right on the nose.

I mean, I would -- we're forecasting something on the order of $1 billion worth of loan growth into the next quarter and beyond.

It's a little tricky, trying to give you the exact breakdown of how much is coming out of New York and how much out of Florida, but we can expect to see both of these markets continue to grow, certainly over the balance of this year.

Okay, secondly, how should we think about the growth and kind of overall earning assets?

You sold some securities this quarter to fund loan growth.

I'm assuming we should expect that to continue.

Then longer-term, how do you think about the size of the securities portfolio as a percent of overall earning assets?

I am going to give that to Raj.

Yes, I mean, we're coming from a place where we were not capital constrained to if we look forward six or eight quarters, we have to start thinking about allocating balance sheet space wisely, or even more wisely than today.

So securities portfolio, which has been $4 billion, $4.5 billion for us, you should expect that to shrink, though not right away but into next year we will start to shrink that and make room for higher yielding loans.

Even within the loan portfolio, for example, we had $250 million of growth in RESI mortgages.

I would expect that number lower going forward as we grow more C&I and CRE and leasing assets which are higher yielding.

There will be that adjustment of the balance sheet, securities will certainly be a major player on our balance sheet, but it won't be, you shouldn't expect it to grow, you should expect it to shrink, more so in 2014 than 2013.

Another, the securities that were sold this quarter, obviously other factors enter into this.

Those were some fixed-rate securities with fairly long duration.

Given the movements we're seeing in rates it made sense for several reasons to sell those particular securities.

Remember that we continue to have a sizable macro hedge on this balance sheet that we really put on years ago.

We've increased that.

We actually made a significant long-term liability borrowing with the federal home loan bank before the first speech that Mr. Bernanke made this past quarter, which worked out significantly in our favor.

It allows us to be very competitive in the loan market, at least for the time being.

On the right side of the balance sheet, you should start see deposits growth, something which, obviously we're growing deposits but not as aggressively as loans but we will start to grow deposits as well as we tweak around our incentive plans.

Also on the FHLB front, it's been pretty flat for the last four or five years and we've used it just to term out our liabilities but as our balance sheet grows, we will start to one, grow that a little bit, but also that process of terming it out and having it longer-term, continue to see that.

It's a process, we'll continue to have long durational liabilities through the FHLB.

Yes.

Thanks very much.

Brady Gailey from KBW.

Thanks.

It's Brady Gailey with KBW.

Good morning.

The margin continues to -- annual assessments it continues to come ahead of you all's guidance and where you think it's headed.

What's the updated thought on where the margin goes in the back half of this year and then into 2014?

Sure, Brady.

The margin was positively impacted this quarter by a couple factors, one, as John and Raj just alluded to, the cost of funds is coming down.

Two, loans are -- even though loan yields are coming down, they still are higher than yields on other types of earning assets and the loan book is comprising a greater proportion of our interest earning assets, and our earnings and margin continue to be favorably impacted by the loan sales.

This quarter in particular -- I know the last couple quarters' interest income, as you know, Brady, has gotten a benefit from the loan sale and the effect of that this quarter, about $15.5 million ran through interest income and that without that, the margin would have been 5.57%.

So that gives you an idea of the impact of that.

We're going to see that particular item trail off over the next several quarters.

There will be a little less next quarter, a little less the quarter after that, and by the time we get to mid 2014, that particular item will be deminimus.

Our guidance for NIM by the end of the year, we're still sticking to the guidance we gave you earlier, which would be about down between 60 and 70 BIPs from what it was last year, so maybe 5.3% to 5.4% range by the end of this year, and then north of 4% by the end of '14 is what we're seeing.

That's all consistent with what we've said all along, that as new assets coming on at lower yields replace these legacy assets, we're going to see margin compression.

If rates continue to tick up, we'll get some benefit from that, but I haven't factored that eventuality --

Well, we can't anticipate, or don't dare try is, if rates continue to move up in the marketplace as a result of a more robust economy, and these two marketplaces that we serve continue to heal and grow at a greater velocity, that is an ideal situation for this balance sheet, given our position and given the velocity of loan growth.

Absolutely.

So this is, if we could have written this book, we couldn't have written it much better.

Brady, another thing I'd reiterate, we've been saying for a long time that our expectation is that there will be a trough in earnings as the benefit from these legacy assets winds down and as new assets are put on.

We still expect that to happen.

Our current estimate of when we are going to see that trough is probably mid 2014 so we'll see -- we expect to see earnings come down quarterly from now until then and then the trajectory to head up.

That keeps getting pushed out.

We're happy about that.

Right.

That's a good problem.

That's a good problem to have, but we still anticipate seeing that happen.

Okay, and I know it's looking further out, but as analysts start to think about 2015, and specifically the margin, if you're going to be a little north of 4% by the end of '14, do you think that's a pretty stable level or do you think that it kind of bottoms in the high 3% range?

Or is it just too far out to know?

I don't know what Leslie is going to say but I'm dying to hear the answer actually myself because it's so unpredictable.

I'll preface her real answer by saying, look, if rates continue to trend up and the market stays healthy, it could be solid and up and from there.

It's a little early.

I'll still trying to figure out what is going to happen next month.

That's fair.

And then lastly, one thing I was surprised about was the comp line.

It know it was pretty much flat at $43 million.

I know, John, I know you hired a ton of people in New York this quarter.

I guess what's going to be the new --

Volunteers.

[ Laughter ] They're volunteers.

Brady, you're going to see some uptick in that next quarter.

We haven't felt the full impact of that yet, some of those people didn't come on until midway through the quarter.

There were a few conflicting things going on in the comp line but you're going to see some uptick next quarter and that we, fortunately, we were able to put that uptick off a quarter but you're going to see that.

How much of an uptick do you think we see?

from $43 million to $46 million or more than that?

Yes, about that.

About that?

Okay.

All right, thanks for the color, guys.

Sure.

Matthew Clark from Credit Suisse.

Good morning, guys.

As a follow-up to Brady's question, should we begin to then see stabilization in the comp and just the overall run rate of expenses, I guess, with all -- there's some noise in there obviously, but just wondering if we could start to see some positive operating leverage.

Yes, I think you'll see stabilization in comp.

You'll see a little bit of an uptick in occupancy next quarter, too, as depreciation comes online for some of the assets we've added, but not huge.

There's also probability going to be a little bit of an impact in Q3 and Q4 this year, the cost of doing our stress testing and capital-planning exercise, that we have to do for the first time this year and moving into the CCAR world.

You'll see a few million dollars of uptick and then it really should stabilize.

I mean, look, sort of gut feeling I have is by the fourth quarter is when if you take out the cost of the stress testing --

Yes.

That's probably a good run rate going into next year.

We're pretty well there, Matt, on people in New York.

We've hired -- oh, gosh, we've hired 89 new people.

Our branches are pretty well-staffed.

Our private banking group is 95% done.

Our lending group is 95% done.

Remember, too, that -- talking about operating leverage, that a lot of these loans that you're seeing got booked in the very latter -- the very last part of this quarter so we really didn't, we don't see much revenue from that.

We will start seeing that in this next quarter, so I think you will see operating -- you'll see positive operating leverage as a result of this whole exercise starting in the fourth quarter.

Absolutely.

Okay, and then on the pipeline, any update there?

I think it was around $1 billion a month or so a few weeks back.

Just curious if that has changed dramatically at all.

No, that's about where it is.

It's obviously a little higher than that, but we find those things are hard to predict because while the pipeline's higher than that, they don't all get across the finish line.

As we said, our forecast is for about $1 billion worth of loan asset growth again in the next quarter.

And I think your original guidance for New York included the RESI mortgage purchases.

You have $260 million without it.

Do you feel like you're there with the RESI stuff that you did in the tri-state area?

With the RESI business, the origination business on the RESI side is just beginning to pick up, we just hired the right people for that in New York.

The numbers you see here are mostly from purchases and like I said earlier, I expect to see less purchase in the coming quarters than the $250 million we had this quarter.

Okay, thanks, guys.

The loan growth prognostications in New York do not anticipate a significant amount of residential origination.

Okay, fair enough.

Herman Chan from Wells Fargo.

Thanks.

I'm curious to learn more about the loan yields from the New York originations versus that of Florida and hearing competitors -- there was a mention some of the pricing in New York has alleviated somewhat.

I want to get your take on the competitive environment in New York.

Thanks.

It's competitive -- it's highly competitive in both markets.

Depending upon the loan categories, some categories are more competitive in New York than they are in Florida.

Multifamily lending, as an example in New York, is a very crowded space.

We have a lot of new entrants into that business that are compromising on rate, as well as terms, which has kept us away from some of that work.

Generally speaking, I mean, the loan yields for this quarter, in the mid 3%s of this $1.1 billion worth of growth, residentials slightly less, and we expect to see that uptick slightly from here.

But in terns of competition, they're not giving it away anywhere.

Everybody is scrambling pretty hard for deposit share, but obviously, we're rekindling old banking relationships that we have had for many years in New York, so none of this business that we're putting on the books in New York are to people that we don't know.

This is all customers that we're familiar with and have had for many years and we see a strong pipeline of those people on for the rest of the year.

So while pricing will continue to be an issue as rates move up, we think we'll be able to improve our spreads.

Great.

Thanks.

And what are some of your expectations for future branch expansion, both in New York and Florida, given the strong loan growth in Q2 and that should continue?

I'm wondering about the need to grow the deposit base a little bit faster to fund the impressive loan growth that you're expecting.

Yes, we think about that, but unfortunately, owing to some change in customer behavior today, building new branches doesn't necessarily translate into growing deposits, and we can see that demonstrated in lots of different bank franchises across the country, so we are thinking about the need to fund this robust loan growth over the next six quarters.

But I would say that at least for now the idea of aggressively opening branches is not on the top of our list.

We've got 100 or so locations in Florida.

Four or five new ones coming up this year in New York with those four locations in Manhattan.

Don't be surprised to see us open, something, one or two more on Long Island, possibly in the boroughs, and one or two more in Manhattan, but no aggressive branch opening plans effective, more and more with the advent of electronic banking, people are less and less dependent, you can see it yourself.

Walk by your local bank and you no longer see the lines out the window, out the doors rather on Friday afternoon with people cashing their paychecks or business customers lined up to do transactions.

Those -- that business is not really being done in the branches anymore.

We're going to be careful about that, we don't think it's the most efficient way to fund loan growth, although it will be part of the picture.

Understood.

Thank you very much.

Thank you.

(Operator Instructions)

Matthew Lee.

Yes, hello.

It's Matthew Lee of Inner City Press It's very interesting, I wanted to ask one thing about the way that BankUnited is serving New York.

I've heard that the community, what's called the Community Reinvestment Act assessment area is only parts of Manhattan and Suffolk.

I wanted to know if that's true and also if Mr. Kanas can say more about the possibility of opening branches in the boroughs and which boroughs those would be.

Matthew, I didn't hear the first part of your question.

Hello, again by the way, I haven't seen you in years.

It had to do with the CRA assessment area, the idea that you are supposed to lend in low to moderate income communities in your community but it's defined by where your branches are.

I wanted to know if it's just in Manhattan and Suffolk currently, and if there are any ideas of changing that.

Yes, our branches currently are just in Manhattan and one in Suffolk.

We do think that there may be a place for us to open a branch or two in the boroughs and many of those areas, as you know, are lower-mod areas.

We've had great success there in the past.

With our other institution, North Fort, but we have nothing, no plans that are concrete right now.

And at least just one follow-up, if you don't mind.

You had said that some of these relationships are ones that you had in the past.

That's why I'm sort of wondering, even though the branches are in Manhattan, are any of these deposit or lending relationships in the outer boroughs where you used to do business?

Generally speaking, no.

Generally speaking, the Manhattan deposits are from Manhattan and the deposits we have on Long Island are aggregated and in Melville and they're from Suffolk -- Suffolk and Nassau actually.

That Long Island branch is almost on the line between Nassau and Suffolk Counties on Route 110.

Got you.

Thank you.

We have no more questions.

I'd now like to hand over to John Kanas for closing remarks.

Appreciate your tuning in this morning.

Obviously we're very excited about the balance of this year for BankUnited.

We've got a tiger by the tail here and we believe that this growth rate will continue.

Some quarters ago, a number of you raised the question about stock repurchases and increasing dividends and what are we going with all this extra capital and we said to you at the time that we thought that our growth was going to take care of that.

And it's looking more and more like that's exactly what's happening and I think last quarter we said we will grow into this capital by the middle of 2014, certainly looks like that's right.

We are, as always, mindful of M&A opportunities, don't see anything in particular right now that makes a great deal of sense either in the north or in the south, but that market changes from time to time, and we are always on the lookout for something that might make a contribution.

The one thing that's worth highlighting and that we don't really talk about very much is that the subsidiary lenders that are (inaudible) municipal lease lending operation out in Arizona and our small business lending operation in Baltimore, we haven't talked about them much because they really haven't made a big impact but they are starting to make significant contributions.

And we think that those kind of activities may well be a more and more important part of our bank story as we go forward.

New York is -- the New York market is growing by leaps and bounds, particularly in Manhattan, and we think that we will share in that success and get at least our portion of growth, if not a little bit more than our portion of growth, over the balance of this year and, frankly, looking out into 2014, things look quite good.

As Leslie said, we can see the EPS trailing off between now and the middle of next year and we think that that trough is about behind -- I know we've kept moving that out as we've done better and better and maybe next quarter we'll move it out again another quarter, but this balance sheet is performing almost to the T as we had hoped and predicted that it would.

Loan quality continues to be a non-issue in for the most part the whole industry, for those of you who have been around long enough, you know that that will change someday and when it does, there will be other things to talk about.

But right now, we're very pleased with this performance and look forward to the balance of the year.

I thank you again for your participation and look forward to seeing many of you on the road over the next two or three months.

Thank you.

Thank you.

Thank you.

Ladies and gentlemen, that concluding your conference call for today.

You may now disconnect.

Thank you for joining, and enjoy the rest of your day.