BankUnited Inc (BKU) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 3, 2013 BankUnited Incorporated earnings conference call.

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

(Operator Instructions)

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

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

Please proceed.

Good morning.

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

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 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, believe, success, 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 on the Company's current plans, estimates, and expectations.

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

Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to the Company's operations, financial results, financial conditions, 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 those factors can be found in the Company's Annual Report on Form 10K for the year ended December 31, 2012, available at the SEC's website, SEC.gov.

John?

Thanks, Mary.

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

The numbers came in about where we expected, a little bit richer on deposit growth than we had anticipated.

I'll make a couple of comments on the loan growth.

That was about give or take -- on loan growth, about $245 million in purchase mortgages, $165 million or so from the national subsidiaries, $265 million out of Florida, $350 million out of New York.

You should, for purposes of being a little bit more accurate, add another $1 billion or so to loan growth because we did another $1 billion in operating leases.

I'm sorry, $100 million which are not reflected -- add $100 million to the $1.1 billion which are not reflected on the loan growth figure that came in by way of the operating leases.

Total deposits were an impressive number for us this quarter and already New York is responsible for about a third of that deposit growth.

The tax adjustment that you see in our earnings release is responsible for about $0.03.

Leslie can answer any questions you might have about that later.

So you might call this quarter $0.49 versus what we expected -- what the street expected, about $0.46.

We continue to benefit from living in two of the fastest growing markets in the United States -- Manhattan-centric New York and Miami-centric South Florida.

The South Florida market continues to show robust growth as real estate values continue to improve.

I would add that we're still not seeing a broad-based recovery in the entire State of Florida, and generally speaking, it is still true that the further north and west you go, that the slower the recovery seems to be taking hold.

But we are seeing some impressive numbers and a fairly dramatic improvement in the employment picture in the entire State of Florida.

New York and particularly the New York Metropolitan area continues to be healthy and grow.

Construction cranes are working all over Manhattan.

Real estate values are continuing to improve and our section of the market, which is sort of mid-market operators and mid-market borrowers in both real estate and general C&I, are getting healthier by the moment.

So we continue to be optimistic out into the fourth quarter and into 2014 for continuation of this kind of asset and liability growth.

I think it is fair to say we continue to expect to see loan growth eclipsing deposit growth by some amount.

But nonetheless, we do expect to see deposit growth continue at these kinds of rates that we have seen this quarter.

So all in all, not much to add to this other than we are beginning to hit on all cylinders here.

Probably starting to think about opening one or two more branches in the New York Metropolitan area.

We've got our eye on a spot in Brooklyn right now and probably begin to develop plans for one further east Long Island location sometime later in the year or early next year based upon the demand that we are getting for our services in those markets.

Generally I have nothing more to say and would be happy to open up the conversation to questions.

(Operator Instructions)

Brady Gailey, KBW.

Good morning, guys.

John, what were you saying about the extra $100 million of growth from operating leases?

Is that something that did not happen in 3Q but in 4Q?

Could you just clarify that?

No, no, no.

You should add another $100 million worth of asset growth to the third quarter and that is $100 million worth of operating leases which does not show up in the loan growth figure.

$100 million of the growth is in other assets but it's operating leases but we put them in loans, but nevertheless, it is an interest earning asset.

Okay.

I got you.

$100 billion to a [not] a billion.

I got you.

So the total growth would be $1.2 billion.

Okay.

And then I know last quarter you all provided a little bit of guidance on the margin following by year-end 2013 fall on account of the 5.3% to 5.4% and then by year-end 2014 still remain a little bit above 4%.

Has that guidance changed at all?

Brady, I think that is still about right.

We may end up for the year ended 12-31-13 a little higher than that 5.3%, 5.4% but I don't expect it to be a significantly higher than that.

So I think that is in the ballpark, yes.

Okay.

And then John, did you do anything different to get this higher level of deposit growth?

Is there a new focus here?

Or is this just things are finally starting to kick in?

Or why the uptick in deposit growth?

Two things.

For one thing we stopped kicking deposits out in Florida.

If you look at our last eight or nine quarters, you can see that we continue to ratchet down deposit costs in Florida and effectively really spent the last four years jettisoning deposits.

We stopped doing that.

And so we have stabilized our rates in Florida and that has resulted in deposits flowing in from Florida I think a little more than $500 million of the deposits coming into Florida.

And New York is starting to kick in.

I said to you last quarter that the loans go on first and then the deposits follow because a lot of the deposit relationships that we take on in New York are complicated treasury management accounts that take a lot of time and effort to get loaded onto our systems and unloaded from where they are.

We expect, by the way, that will be affected dramatically at year end because a lot of the accounts are coming over from other places are waiting until the end of the fiscal year before they bring that business over here too.

So that's why we're kind of encouraged about that.

So no, we have not done anything special other than to stop being unfriendly to deposits in Florida and begin to onboard the full relationships that we are getting in New York.

Okay, and then finally, are you guys out of the M&A game?

Because with this level of organic loan growth, you are going to deploy your capital organically in the not-too-distant future.

So is M&A really on the back burner now?

You know what I have said about this in the past.

We would love to find a way to grow the franchise that way.

But frankly, pricing in the M&A world is very unattractive in our view.

There is not a whole lot to do in Florida, as you have heard me say before that the institutions when you drop down from us, are very small.

And in this regulatory environment it's hard to get excited about exposing ourselves to the process of having to go through a merger application for something that is less than a $5 billion or so bank.

Not to say that we wouldn't someday, but it's hard to get excited about that.

And with regard to the larger institutions in the northeast, as you know, the market has taken values up, I don't want to say universally, but consistently for the whole industry, and we are having a hard time finding anything that makes sense.

We're looking at a lot of these companies that we think are long-term potential pick-up candidates and we think they're trading through the value of the Company.

So until that changes, or until our stock goes to three times book, I guess we will continue to feel that way.

And Brady, we tend to go a little two to the left, two to the right.

I just want to be clear.

We're not saying that we are out of M&A game completely.

As of just a week ago, we were still talking to people.

So we continue to be in M&A dialogues but there's nothing that is imminent which is no different from a quarter ago or a year ago.

We will do a deal when it makes sense for us and if it doesn't, organic growth is a great.

We don't have to do a deal.

It would be nice to get a deal on our terms.

He makes a good point.

I don't think a week goes by when we are not engaged in conversation with two or three and sometimes four different potential candidates.

We just cannot seem to get the numbers to work, at least right now.

Okay.

Thanks for the color.

Rob Placet, Deutsche Bank

Good morning.

The first question, I was just curious if you guys could give the mix of loan growth between Florida and New York?

Yes.

I think we did that already.

I apologize.

That's okay.

Give or take to $260 million out of Florida, $360 million out of New York.

Okay, great.

And then is New York still prominently commercial real estate?

And if so, what segments are you growing the most in?

Where do you see the biggest opportunities for growth in?

Are you talking about in New York?

Yes, in New York.

New York is and always will be skewed toward commercial real estate.

The biggest part of the New York market and it's the part of the market that we have operated in successfully for many years.

We are beginning to see growth in the pure C&I world in New York and particularly we have recently hired and added to the team of smaller business lenders in New York and expect to see that on a percentage basis grow quicker than any other.

But I think, forever and always, New York will be dominated by some version of commercial real estate and that there is a wide span of products within commercial real estate that would include owner occupied, it includes pure multifamily, it includes mixed use properties that are partially commercial and partially residential.

It includes buildings that are underperforming where we finance a building for somebody at a little bit higher interest rate for a customer that we know very well, work with him to prepare the building to a point where it cash flows later and can stand a conventional mortgage.

So there's a wide variety of product within the sort of total category of commercial real estate but I think you could expect that to continue.

Okay, and then in terms of the pace of loan growth in Florida, just given the continued rebound in the economy down there, should we expect that the pace of growth to increase down there or are you comfortable growing at that pace you have been growing the past couple of quarters?

We are certainly comfortable with thinking about the pace remaining at least the same.

We have had to back off a few deals in both Florida and New York because we don't want to make the pricing competition.

We are seeing vigorous pricing competition in both markets.

Were it not for that, loan growth could be much higher in both of these markets for us but we are trying to be disciplined -- we are being disciplined.

I know everyone says that, right?

We are trying being disciplined with regard to price and terms.

And we actually are seeing some competition with regard to structure of credit which is an area that we are hesitant to play in.

So I think it is reasonable to expect the same kind of growth.

While I think the Florida market will accelerate its growth from here, at least into the foreseeable future, I think that our long growth will stay about the same, perhaps increase a little bit.

Okay and then just lastly.

I was just curious if you had an outlook for the growth in your operating lease portfolio just given the nice uptick in balances there?

I think it will be moderate at best from this point on.

Rob, I don't see -- I think that portfolio will continue to grow at a moderate pace.

That's a number that we completely control.

Yes.

There is a lot of business in that space if we want to go get it.

But we are balancing that with our other taxable income.

Okay.

Thanks very much.

Erica Najarian.

Good morning.

My first question, I just wanted to get, John, some clarity on your comments on loan growth.

You mentioned that you expect growth to accelerate in Florida but the pace of overall loan growth will stay about the same, but given the momentum that you are posting it in New York, if growth in Florida is accelerating and New York will continue on as is, should we expect the piece of commercial (technical difficulty).

Erica, it is Raj.

You should expect to see less growth in the residential side.

It seems Erica has dropped off the question queue.

Erica, can you hear us?

(Operator Instructions)

So I guess the offset there, Raj, is that you are going to cease the residential real estate purchase program as the quarter loan growth gets better in both regions.

Yes, we will see less -- you should see less residential loan purchase in the future.

Got it.

And as we think about your run rate for expenses next year as you continue to expand organically in New York, Leslie, how should we think about the $84.5 million of quarterly run rate in terms of growth rate for next year?

So I think you're going to see that actually increase some probably starting next quarter, as we have the full impact of the employees we have added in New York over the last two quarters, the full impact of the branches we've opened here for a quarter, some additional regulatory compliance costs.

So I think you'll see that go up to $2 million to $3 million, let's say $3 million a quarter and then if we expand our branch network probably a little bit more on top of that.

Not that much every quarter I said, and that will be the new run rate, let me clarify.

So $2 million to $3 million additional for next quarter and then slight growth from there as we think about 2014.

Right.

Thank you.

Herman Chan, Wells Fargo Securities.

Thanks.

Can you give us an update on the loan yields you are getting on new production in the third quarter?

And also as benchmark yields drop a little, how do expect pricing to trend in the near term?

Thanks.

So Herman, we are seeing on average, we are putting loans on for the quarter, this quarter they came on between [3.30% and 3.50%].

Obviously that varies depending on -- by product type, but that is an average for the quarter.

Little bit higher in Florida than New York but that is a function of product mix really rather than a function of market pricing.

I don't think short-term volatility in benchmark rates has a marked impact on loan pricing.

I think we need to see something more sustained before it really starts to impact our average yields.

Got you.

Thanks.

And can you talk about some of the other lending activities in the national businesses?

How much of a contribution should we expect from municipal lending and the like going forward?

We are pretty comfortable with the distribution of lending growth, as you can see it.

Both of these companies have the capacity to do significantly more business.

I don't know, Leslie, what would you add to that?

I think we saw about $165 million in growth in that business this quarter.

I think that is probably a reasonable expectation going forward.

Those books account for about $875 million of the new loan portfolio right now, and about half of that is the municipal business and the rest is the equipment finance businesses.

And that -- probably that mix will continue for the near term.

Great.

Thank you very much.

Joe Fenech, Sandler O'Neill Company.

Good morning, guys.

Any preliminary guidance, Leslie, for how you are thinking about an NIM for next year with what you're seeing on loan growth and then factoring in the FDIC accounting as well?

So as we've stated in the past, you are going to see the NIM continue to come down.

You'll see it come down next quarter.

That is a product of two things.

One is simply new loans comprising a larger percentage of the portfolio.

The other is some of these events in the covered loan portfolio that have been enriching the NIM for the last several quarters are going to begin to taper off over the next 2 to 3 quarters.

So you are going to see NIM come down quarter by quarter.

Again, we will probably be somewhere between four or four and a quarter for 2014.

By year-end, right?

Not for the year?

Well, yes.

For the year.

Okay.

And then the yield on the covered that you alluded to, Leslie, was roughly flat late quarter.

Are we kind of at about the end of the reclassifications from non-accretable to accretable?

Or do you think as things continue to improve because we could still see little bit more of that?

I think we will continue to see more of that.

I think about now, you can call me about this later if you want more details.

We have had some impact on the NIM from this zero carrying valued pool that is out there and that is what you are going to see come to an end.

Okay.

And then John, with loan growth a little stronger expected, any update on when you expect to work the excess capital down from what you think is a more normalized level?

And then also with capital, the dividend yield was at the higher end of your peer group not too long ago.

It's probably more middle of the pack now?

How do you sort of think about the other levers besides growth at your disposal to work down the excess capital?

We have been saying for some time, Joe, that we think that by third to fourth quarter or so of next year that we have effectively grown into the excess capital that we have had.

With regard to dividend policies, it's something that the Board and I have to talk about later this year.

Obviously, at this growth rate, it calls to question as to whether or not we want to start paying a higher dividend out, probably not and particularly since our expectation for this kind of growth for the next six quarters remains high.

So we are -- really nothing, Joe, has really changed since we reported this last quarter.

And that is working down that excess capital ratio by later next year and then having to think about what we do about it at that time.

Okay.

And then I guess lastly, Raj, you've talked about the rationale for the allowance to noncovered loans coming down.

You're at about 73 bps now I think in terms of the noncovered allowance to noncovered.

Can you update us, Raj, on your thinking on the reserve?

I will let Leslie take this one.

So this quarter in particular, I know we have stated this in the past, it's in our disclosures, our allowance is based on peer groups proxy data loss factors because of the absence of historical data of our own.

This quarter we did have a benefit, so to speak, because those peer group average factors came down pretty significantly this quarter.

I don't really expect that to continue.

I think we are probably going to see that start to level off.

So provisioning will probably go up next quarter.

That's our current anticipation.

But it's purely been a factor of the peer group net charge on factors coming down and I think we are going to see that level off and stabilize.

Okay, thank you.

Gerard Cassidy, RBC.

Thank you.

Good morning guys.

Leslie, coming back to the net interest margin, I think you said that we should expect a 5.35%, 5.34% by the end of the year.

Is that correct?

Yes, it maybe little bit higher on a year-to-date basis, Gerard.

That's what I was going to ask.

Was that for the full year you think it will be that?

Or just for the fourth quarter?

I think for the fourth quarter it may actually be little bit lower than that.

For the full year, a little bit higher.

Okay.

How much in the margin this quarter was favorably impacted from the income from the ACI loan pool that you carry at zero that you bring into net interest income?

That had about a 45 basis point impact on the NIM, about $13 million.

Okay, and I think you indicated that is going away.

Is that correct?

Yes, it will trail off over the next two to three quarters and after that the impact will be deminimus, I would say.

Okay.

On the reclassification from the non-accretable difference, you guys reported it was $231 million through nine months.

I think through six months, it was $216 million.

Any reason for the slowdown versus the prior two quarters?

Gerard, it is just -- I just think that the portfolio is just kind of starting to stabilize really.

And the rate of improvement is probably slowing a little bit.

A lot of the non-performing loans have been worked out of that portfolio.

So I just think you have got a more stable portfolio.

However, having said that, it is somewhat unpredictable.

Okay, thank you.

And John, not to get too political, but obviously there is a mayors race in New York and it seems like a very liberal candidate may win, raising taxes on (laughter) folks and such.

In talking to the folks that you are doing business with, are they concerned at all about what could happen to the City over the next 2 to 3 years and what that may mean for some of the success in the real estate markets?

We are putting money together right now to run Raj against that guy.

(laughter) Well, it's a topic of great conversation in New York.

I can't say anybody's running around panicking and dumping real estate.

But there is deep concern, of course, that a liberalized attitude in New York City could have a negative impact on the growth factor and safety and everything else that we have built up here in the last 20 years.

I suspect, as is usually the case, that candidates say a lot of things to get elected.

And we are hopeful that if de Blasio does get elected, that he will move to the center on some of his policies as reality sinks in.

So sure, it is discussed but it is in that category of we are going to have to live with whatever happens here.

I will say that a tremendous amount of Manhattan's growth is coming from non-US sources.

We are the receptacle for flight capital from all over the world.

And these gigantic condo towers going up the middle of town, selling units for $50 million and $60 million and $70 million and $80 million apiece.

And I think that the momentum behind that movement is very strong and unlikely to be very much affected by local politics for at least a few years.

Thank you.

Brady Gailey, KBW.

Just a quick follow-up.

You know, private equity still owns a third of your bank.

I think they hit the five-year mark from initial investment in May of next year.

I know they have already sold down a couple of times.

But, do you think -- what do you think happens with that ownership piece as that gets closer and closer to the five-year mark?

Are they in it for the longer term?

Or do think they will be forced to harvest some of the gains there?

Brady, what we have always commented about this before is that, as you know, this not exact -- the relationship between private equity owners and regulators is not perfect.

So, from the standpoint of the bank and its shareholders and its future, it would be nice to get the private equity guys down at least below 5% over some period of time.

And I think that our desire to do that is consistent with their desire to over time, lighten their investment.

It would not be surprising to see over the next couple of years, a couple of small secondaries to reduce their positions even further.

They continue to act with Management and in concert with the best interests of the Company.

So to summarize, I think both we and they would like to see them get below 5% over some time period in the future, but in a nondisruptive way.

And are you talking about 5% in total?

Or 5% per private equity term?

No, 5% per guy.

Right now I think the three big guys are at a little bit over 8% and [Sennabridge] is a little over 6%.

So it would not take a whole lot more to get them down to each being under 5%.

And once they're under 5%, by the way, they are at least as I understand it right now, off the radar screen from the standpoint of the Federal Reserve and they are released from some of the agreements that they have made.

And it does free the Bank up to do business with many of their subsidiary companies that we are prohibited from dealing with today.

So there is a big benefit to both us and them, I think, in the future to work them down to a little bit lesser level.

Okay, thank you.

David Darst, Guggenheim Partners.

Good morning.

Leslie, would you kind of run back over some of your loss methodology on the reserve and provision and just maybe help me understand how to think about the way you are reserving for loan growth?

Sure.

It's not a real, fortunately I guess, it's a real complex methodology.

Basically, we are applying a peer group net charge-off factor to loan balances, essentially, for past rate and loans, which is by far the sizable majority of the portfolio.

And so those peer group loss factors are impacting our reserve.

This quarter, we saw a noticeable or marked decline in those peer group net charge-off factors which resulted in smaller loss factors being applied to the portfolio.

I don't expect those decline to continue.

We think that is going to stabilize.

So we'll see probably provision expense increase over the next couple of quarters a little bit since we won't have sort of a one-time benefit of those lower loss factors being applied to the whole portfolio that resulted in a little bit lower provision for this quarter and bringing the ratio of the allowance to loans down a little bit.

Right.

And then the fact that that methodology suggested reserve release whereas you are still entering --

Right because of growth, exactly.

And then, within your expense base, if you look at the $44 million of kind of the personnel numbers, as the covered loan portfolio and the related internal expense from managing the workout process declines, how much might be embedded in that number that you could then redirect into supporting revenue growth?

I cannot really give you a number off the top of my head, David, but certainly that is occurring.

Those people as that portfolio runs off, those people are being repurposed to servicing and managing the new loans that we are putting on the books.

So we are not adding a lot of back office servicing portfolio management type expense as we grow the new loan book.

Okay, great.

Thank you.

Matthew Clark, Credit Suisse.

Leslie, can you just clarify the margin guidance?

For the upcoming quarter, I believe you said a little bit better than 5.3%, 5.4% but then it sounded more like the full year.

And then for next year, is the four to four and a quarter you are guiding to for the fourth quarter or again, for the full year?

For the full year.

And again, next quarter I would expect the yield for the quarter to be a little bit below that 5.3% to 5.4%.

But I would expect the yield for the full year to be that or little bit higher for 2013.

Okay.

Great.

And then, for New York, can you update us there on the size of the pipeline?

I assume you still are on board with getting that run rate closer to 500 for the fourth quarter or is that maybe pushed out because of competition?

No, that pipeline in New York is stronger than ever.

And as time goes by, we expect, although Florida's doing remarkably well, I would expect that New York would begin to catch up and equal the kind of loan growth we're seeing in Florida over the next couple of quarters.

I might make a comment here about loan growth because these eye-popping numbers certainly are contradicted by other institutions in other parts of the country.

I remind you of a number of things.

We have invested very heavily over the last two years in the lending function in our bank getting ready for a recovery in both New York and in Florida.

So some of what you are seeing is a result of us having gotten prepared for this very early.

Also, as a MidCap OCC bank, as you know, all banks in our category are required to put a three-year business plan up in front of the regulators and update that plan at least annually.

And everything you are seeing, by the way, is consistent with -- is completely consistent with everything that we have mapped out for the regulators for this year and for the next couple of years.

So, while these are eye-popping numbers, they are completely consistent with what we thought would happen as a result of our positioning in both of these markets during this time.

And I can assure you that regulators are very focused on our loan growth and are sitting on our shoulders watching this loan growth to assure themselves that this is not a reckless kind of behavior but in fact, simply a byproduct of growth in these markets.

And remember that we continue to benefit greatly by the return of our old customers in New York which, the volume of which continues to increase and will increase in the foreseeable future.

In the New York pipeline, I think it was $1 billion last quarter.

Where did that stand today?

It is a little more than that.

All right.

And then on the comp expense line I think the expectation was that was going to be up maybe a little bit more this quarter.

You guys have I think hired everybody you need and I think you have got it that you expect expenses to drift higher with everybody fully baked in.

But just curious why maybe it held in a little bit better than expected this quarter?

I think it was a factor of the timing of the people (multiple speakers) being brought on over the last quarter or so.

I think you'll see the full run rate next quarter.

Okay.

Fair enough.

Thanks.

We have no questions at this time.

(Operator Instructions)

Hearing none.

I just want to thank you all for taking time to listen to our report today.

Obviously, we are very pleased.

We continue to be very optimistic about this kind of growth for the future for BankUnited.

We are one of the few growth stories in this industry and we expect to continue to be one of the few growth stories in this industry out over the next year two and we are very anxious to get on with 2014 which is lining up very strongly for us.

I know everybody likes to talk about M&A.

We continue and I repeat what Raj and I both said earlier.

We continue to look for opportunities to grow this franchise through inorganic ways.

But frankly, when you're growing loans by $1 billion a quarter and being able to hand pick your own people to make those loans and hand pick your own borrowers, and being able to leverage up operationally in New York by the fact that we are having discounted loan growth with only four branches in the city, it's tough to make the economics at least to find compelling economics to support the idea of an inorganic opportunity.

Although we are hopeful and we think that as hopefully as things change over time, and other franchises aren't growing as quickly as we are and might seek opportunities to combine with us, we would love that opportunity.

But right now, we just don't see it.

So thanks again for dialing in and we will talk to you in 90 days.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Enjoy the rest of your day.