BankUnited Inc (BKU) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Q4 2013 BankUnited, Inc.

earnings conference call hosted by Mary Harris, Senior Vice President of Marketing and Public Relations.

My name is Benny and I will be your event manager this morning.

For the conference, remain on listen-only.

(Operator Instructions).

And now I would like to hand over to Mary.

Please go ahead.

Thank you, and good morning.

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

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 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 version of those words or other comparable words.

Any forward-looking statements contained in this call are based on 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 risks or other 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 statements, whether as a result of new information, future developments or otherwise.

A number of important factors could cause actual results to differ materially from those indicated by 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, SEC.gov.

I will hand it over to John.

Thanks, Mary.

Good morning.

Obviously, we're feeling very good about the fourth quarter.

We did $0.50 -- about $52.4 million, a little better than expected, driven mostly by the extraordinary loan growth this quarter.

I'll break that down for you in a minute.

Net income about $209 million, at $2.01 for the year; give us an ROE of 11.16 and an ROA of 1.55.

We broke the barrier of $15 billion for the first time with total assets exceeding that amount as of the end of the year as we head into 2014.

We think that loan growth out into 2014 will fall again somewhere between $4 billion and $5 billion, spread out in a similar way that you saw in 2013.

The difference between this company now and two or three years ago is that we have spread out our loan risk substantially into our national platforms, and broken it up between Florida and New York and into some consumer lending.

So, we have made big progress in diversifying this portfolio.

Loans grew by $1.3 billion for the quarter, and that sets the stage for 2014.

You should not expect to see $1.3 billion per quarter in 2014; there will be ups and downs from there.

But again, somewhere between $4 billion and $5 billion.

The breakdown this quarter was -- flowed about -- just a little under $250 million.

The national platforms did $344 million of growth, and that was -- $170 million of that was purchased resi mortgages, $111 million of that was the lending subs, and a little over $60 million in indirect auto.

New York was responsible for just under $720 million worth of loan growth during that -- during the quarter.

In terms of loan growth by type, it is the same as we've been reporting to you for the last three quarters, and that is mostly C&I and commercial real estate.

And a lot of the commercial real estate classifications is the New York multifamily business.

So that was a little over $1 billion -- $200 million, give or take, from residential mortgage; and less than $100 million from consumer, mostly indirect.

Our strategy continues to revolve around building a balanced loan portfolio both by type and geographically.

As a percentage of the new loan portfolio, 42% is now represented by Florida, 21% by New York, and 37% from the national platforms.

In terms of geographic expansion, looking out at the next year, not much to talk about.

We did open a branch in Brooklyn about a week ago, in Boro Park, where we had a grand opening I guess it -- actually, two weeks ago -- and expect to do a fair amount of business.

We've got a lot of long-term relationships in the Brooklyn market on both the lending side and the deposit side, and have relocated some VAR lenders to that spot.

Over the next couple of years, we will look for one or two more branches in the sort of tri-state region, looking out possibly further on to Long Island.

But if we find anything at all, it will be very small industrial locations where we could increase our outreach on Long Island, particularly in Suffolk, where we only have one branch today.

Our capital continues to exceed all guidelines.

We continue to deploy the capital through the balance sheet growth.

And currently, we anticipate a capital raise probably not until sometime in 2015.

I know we have talked about that before.

Two quarters ago, we were thinking that that might come in 2014.

We now believe that there won't be any need to raise capital until the early part of 2015.

So, overall, a great quarter.

We are enjoying a number of positive things.

Of course, the South Florida market continues to improve dramatically.

The real estate business in this town is coming back day after day.

The unabsorbed condominium market has been fully absorbed, and new construction can be viewed anywhere along Brickell Avenue and, where possible, in Miami Beach as well.

And real estate is the center -- or the focal point, if you will -- of all retail business here in Florida.

And so all of the satellite businesses that revolve around real estate and its recovery are doing very, very well and fueling our C&I portfolio.

New York City, of course, continues to grow.

We're seeing lots of new construction in the residential space in New York, and that seems to be -- everything seems to be pointed toward that continuing into 2014 -- despite our new mayor that everybody is talking about.

(laughter) Everybody seems to be very optimistic about Manhattan and the Boroughs out into 2014 and beyond.

So, all in all, very satisfying results for the Company.

I would -- if I had to put it into just a few words, I would say diversification, which is what we've been concentrating on for the last 18 months, spreading out our risk of loans over different geographic markets and different loan types, all of whom are managed and supervised by people who have had 20 and 25 and 30 years experience in each one of these categories -- and all of whom, by the way, are well-known to us, both in Florida and in New York, and in the national companies.

So we're feeling very, very optimistic with the next year.

If the margins are as terrible as they have been, you'll get to see that.

And I guess Raj and Leslie are going to talk a little bit about margin.

But they're a little better than we expected them to be by now.

But obviously, we're putting on loans at rates that we never thought that we'd be doing.

We are, however -- a good number of our C&I loans are variable rate loans hooked to -- booked to LIBOR.

And when we see an improvement in interest rates, we should see a very quick improvement in the yields of these loan assets, as the economy, the underlying macroeconomy in the United States continues to heal.

Having said that, Raj, have you got some comments about the positive trends in the mortgage business?

Sure.

Thanks, John.

Talking about the right side of the balance sheet, we've continued to grow our deposit base for the year 2013.

Deposits grew by $2 billion.

For the fourth quarter, they grew by a little less than $700 million.

And a vast majority of the growth in the quarter, $535 million of that $700 million-or-so in growth was in demand deposits.

Growth is -- unlike loan growth, which is -- for the fourth quarter, was skewed more towards New York, deposit growth still can be skewed more towards Florida.

However, we expect that to evolve over time, as we are seeing a good pipeline of deposits in New York.

Our stated goal to grow deposits is not dollar-for-dollar with loans but more like 70%, 75% is still our goal for the next few quarters.

We still have excellent deposits, and we will fund the loan growth through not just deposit growth but other leverage as well, such as [starting] down our securities portfolio and also average LP borrowing.

The composition of deposits is -- today stands at 27% demand, both interest-bearing and non-interest-bearing; 42% money market in savings and 31% time.

That 27% number -- we set out a goal for ourselves to try and get that to over 30%.

We're slowly but surely getting there, and expect to get to the 30-plus-percent level sometime this year.

The cost of funds continues to come down, excluding any hedge accounting costs or accretion.

So really capturing the real cost of deposits to what we're paying to our consumers is down to about 58 basis points for the [fourth] quarter.

Just a quick note, a reminder -- the commercial loss share agreement will expire for us.

The fifth year anniversary is coming up in May.

Most of the portfolio that is left is pretty clean.

We are working with the FDIC on looking at our options in terms of selling pieces of that portfolio over the course of next few months; or, as you know, to the extent that FDIC doesn't want us to do that, loan share gets extended for us for those loans that we want to sell.

But that portfolio, whatever is left, is fairly clean, so it's a bit of a non-event for us.

With that, I'll just turn it over to Leslie.

Great.

Morning.

I'll try to fill in a little bit for you, and give you a little bit more information about earnings trends and expectations going forward.

Obviously, pressure on the net interest margin has continued and is expected to continue in the near-term, given the low interest rate environment that we are operating in and the level of pricing competition.

Our NIM declined to 5.73% for the year and 5.24% for the fourth quarter -- obviously, as a result of the fact that we are replacing these high-yielding covered assets with loans that we're making at current market rates of interest.

There is really nothing unexpected about that trend.

We believe that the NIM will continue to contract in the future, as we have stated before.

Nothing has changed about that.

It is very difficult, as you guys always accuse us of, to forecast what the NIM is going to be, going forward, with the kind of growth that we're putting on the balance sheet and the dynamic interest rate environment that's out there.

But we do expect the NIM to continue to decline in 2014.

Net interest income in absolute terms, on the other hand, we expect to be higher in 2014 than it was in 2013, as we continue to grow the balance sheet.

Interest rate risk -- as you know, we managed to a low level.

Nothing has changed about that.

We would expect an increase in rates to have a moderately positive impact on our net interest income.

We would also hope to see better pricing as the yield curve continues to steepen.

In fact, we saw a little bit better pricing in the fourth quarter than we saw in the third quarter, but not dramatically so; not really enough to move the needle very much.

And we still don't expect short-term rates to rise until sometime in 2015.

However, we think there may continue to be some steepening of the curve.

Provision for loan losses you see increased this quarter.

That's a direct correlation to loan growth; nothing unusual going on in there.

Asset quality remains strong, with nonperforming loans to total loans at 0.39% total and 31 basis points in the noncovered portfolio.

Noncovered, nonperforming assets are only 0.16% of total assets, so asset quality metrics remain very, very strong.

68% of our nonperforming assets are still covered assets, even though only 16% of the portfolio is now covered loans.

Noninterest income -- we continue to see the impact of the amortization of the FDIC indemnification asset.

We expect that to continue to increase quarterly through 2014, and then likely start to trend a little lower.

We still intend to sell covered loans on a quarterly basis, but the impacts that you've been seeing the last few quarters from the sale of the pool of loans with a zero carrying value is really just about done.

The impact of that will be insignificant in 2014.

We'll see a little bit in the first couple quarters, and then it will just -- that pool will be gone.

We announced previously -- we have some security gains this quarter.

And as we announced to you previously, that was a result of our decision as a response to the release of the Voelker Rule, to go ahead and divest of some securities that we believe will be impermissible investments under that Rule, and to kind of get out in front of any potential market dislocation that might occur.

Noninterest expense -- we saw increased over the prior year.

That's also just a function of the growth of the Company and the growth of the loan portfolio.

We do expect noninterest expense to trend higher in 2014.

That's going to reflect the full impact of the branch expansion and personnel expansion that we've done in New York.

We didn't feel the full impact of that in 2013.

And there will be some additional augmentation of support staff, obviously, as we continue to grow the loan portfolio, in functions like servicing and IT and whatnot.

We've managed to successfully push a lot of these costs out, but I think we'll see the full impact of those in 2014.

We want to reiterate that, as we said in the past, our expectation is that EPS will decline for 2014.

This was something that's been inevitable since day one, that there would be a trough in earnings as we grow the balance sheet to replace the high-yielding covered assets that are running off.

We expect, again, that it will trend back up, starting in 2015; but there will be -- that trough in earnings is finally upon us, and we fully expect that to occur in 2014.

John, I'll turn it back over to you for any final thoughts or anything you'd like to (multiple speakers) --.

In summary, we continue to enjoy the recovery of the underlying macroeconomy.

Specifically, we are enjoying the recovery of South Florida and the continued growth in the Northeast, which are our two primary markets.

I'm sure we'll get questions on M&A, but let me sort of preempt that by saying -- it's the same old story.

We've -- Raj and his team and I have -- we've probably looked at 20 things this year, both in the Southeast and in the Northeast.

And to put it simply, when we're growing at this rate, and we're able to handpick the assets that we put on our books, and handpick the people whose judgment is behind those assets, and we're able to keep making steps toward fully leveraging this balance sheet through organic growth, it's tough to find an M&A deal that gives us the kind of economic results that would compare favorably to anything that we could do.

Now that doesn't mean we're not going to get anything done.

There's some very interesting thoughts out there and ideas of combining banks this size with other banks this size, and larger and smaller.

But frankly, we haven't seen the right opportunity yet.

We continue to operate in a very different regulatory environment.

We guard our relationship with regulators and take it very, very seriously.

We -- it's not -- this is a different business today.

It's not like the old days.

Regulators are determined to make this a safer and more predictable industry, and we get that.

And we work very closely with them in having them share our thoughts on our growth plans, and particularly upon -- on any of the business strategies that we have going out into the future.

So, overall, a solid quarter.

This is the year, 2014 -- we told you in 2010 that it would probably be 2012 where earnings would start to -- EPS would start to go down as the covered assets were running off.

That didn't happen.

And then we moved it out to 2013, and that didn't happen.

But we can pretty well assure you that in 2014, that will happen.

And particularly as the quarters unfold this year, working our way toward 2015, when that trend will reverse itself, that we will see EPS pressure for a few quarters during 2014.

But we look forward very optimistically to a continuation of this kind of safe and well-organized and strategized growth, and significant earnings impact of these new assets we're putting on the books as rates rise, heading into 2015.

So we couldn't be more pleased, unless our stock was $40 a share.

(laughter) But we're all set -- and actually have gotten off to a very, very strong start already in 2014, and look forward to your questions.

(Operator Instructions) Brady Gailey, KBW.

I know in the past, as it relates to the margin, you all have given guidance of around 4% to 4.25% by year-end 2014.

I just wondered if -- I know it's hard to predict, but I wonder if, the way you all see it now, if that was still the right number?

And then, taking it one step further, any guidance you want to throw out for next year, 2015, on the margin?

2015 is asking a lot, Brady.

Yes, I still think that range for the end of 2014 is about right, somewhere in the mid-4% -- 4.5%, [4.445%] -- for the year and between 4% and 4.25% by the end of the year.

That's still the neighborhood we're looking at.

I would say sitting here today for 2015, around 4%, but I think that's, at this point, really difficult to predict (multiple speakers) that far ahead.

(multiple speakers) Who knows what market rates will be doing by 2015?

Yes.

(multiple speakers) Yes.

It's tough to pull that one out of our hat.

Okay.

And then I continue to be surprised that the comp line was basically flat kind of quarter-to-quarter this year around the $43 million to $44 million.

I know that some of the growth was offset by lower equity comp costs from IPO.

But I guess when you take a step back and look at expenses bigger-picture, it's going to be up 2014 versus 2013.

But what do you think that growth rate looks like?

I mean, do you think it's 5% expense growth year-over-year?

Or is it 10%?

Or how much do you think expenses will grow this year?

I mean, Brady, sitting here today, I think it's probably closer to 10%.

We've managed to hold these costs off, and our philosophy with hiring people is we hire them when we need them.

We don't hire them six months in advance and let them sit around and do nothing until we need them.

But you're right -- we are going to have to add to the headcount to support the growth -- as I said, servicing, IT, compliance; these back office functions we're in the process of augmenting some of the staff there now, and will be in the months and quarters going forward.

You will see that comp line go up in 2014.

Yes.

The front end of the house, Brady, is pretty well built-out.

The retail bankers -- private bankers and retail bankers in the branches are pretty well done.

The commercial complement of lenders, both in Florida and in New York, are pretty well done; certainly all the expensive staff has been hired and in place for some time -- a good part of 2013.

We're -- where we will find the need to add is in the back office.

As this balance sheet grows, and as we keep our mind toward safety and soundness, frankly, and compliance issues, we will be expanding some of the back office staffs to -- frankly, to accommodate that asset growth.

Okay.

Then lastly, the tax rate was a little lower this quarter, which you all mentioned a couple things in the press release about that.

But looking forward, do you think the tax rate is still in that kind of 35% to 36% range?

Brady, for the year for 2014, probably about 35% -- 37%, except for the third quarter.

We're going to have a little bit of a dip in the third quarter.

So that's about what we expect it to run.

Okay.

All right, great.

Thank you for the color.

Matthew Clark, Credit Suisse.

On the New York growth, about two times what you guys did last quarter, running ahead, I think, of plan in terms of run rate.

Can you give us a sense for the mix there, commercial real estate, multifamily, C&I, the breakout?

And also, whether or not there might have been a couple of lumpier credits in there as well?

Just curious about the incremental.

Give us a second here.

So, commercial real estate was a little under $600 million; commercial C&I, $112 million, and [$13 million or $14 million ] in residential.

This -- the way the closings fall on these particular multifamily loans, which tend to be larger, can have a lot of impact on a particular quarter.

So, I mean, don't take the fourth quarter to mean it's going to continue to go up from $1.3 billion and to $1.4 billion, $1.5 billion, and $1.6 billion in the future.

That's unlikely as we remain disciplined here, particularly from rate -- in this rate environment that we know is changing.

So, it's tough to call this quarter-by-quarter, but we're all comfortable by saying $4 billion or $5 billion worth of growth for the whole year 2014.

And then in terms of granularity there, can you give us a sense for maybe the average deals that you're doing within multifamily, in theory?

In deal size?

Deal size?

Yes, just trying to get a sense for lumpiness, if any.

The average deal size in New York is still under $10 million -- just under $10 million.

And we don't make a lot of real big loans.

That hasn't changed.

There is the occasional $30 million or $40 million or $50 million deal, but they're rare.

And so there's not a great deal of lumpiness in that quarter and I don't expect there to be.

Yes, we don't have very large credits in our portfolio.

I think even now, our largest credit -- by relationship, not by loan, by relationship -- is probably $60 million approximately, give or take some.

So, for the size of our balance sheet, we tend to stay away from $300 million-type relationships.

Okay.

And then on pricing, I know things are still very competitive, but can you give us a sense for the types of rates you're getting on multifamily commercial real estate, as well as any incremental change from last quarter?

I will say this, that in the last few quarters, at least, we are seeing intense pressure on pricing in Florida, particularly as the Florida market heats up and gets into full recovery mode.

So we're actually finding, at least for this quarter and last, a little bit more opportunity for rate in New York than in Florida.

And that's reflected in the growth.

Do we have anything more specific here?

Yes.

I mean, on average, these loans are still going on in the mid-3%'s.

I mean, that's -- so it's a few BPS higher this quarter than it was last quarter, but that's still, on average, what we're putting on, Matthew.

I will say this -- that we've really just gotten started with what we call business banking, which is smaller commercial credits in the New York market.

And that team came together late in 2013.

Those loans tend to be higher coupon.

Yes.

4, 4.5%.

Yes, 4%, 4.5%.

And we will see more of that in 2014 than we saw in 2013, because the team is really gaining momentum now.

And certainly, we would prefer to do more of those smaller loans and higher coupons than the larger credits -- which tend to be great credits but at very thin margins.

Okay.

And then just lastly, on deposit pricing, I think in the last quarter or two, you guys had done some promotional pricing to just generate some growth there.

Curious if you guys have -- still have -- what your rates, I guess, are on maybe the city promotions in New York?

In New York, we actually had to offer less in terms of promotional pricing, because it's not really a consumer-based business in the North.

But here in Miami, we do, from time to time, offer promotions to bring in new business.

But overall, we are taking costs of funds down, even as we speak.

We did a -- the last repricing was done, I want to say, in early December.

So you see some impact of that in the fourth quarter.

You'll see the rest of it in the first quarter.

Again, these are small steps now.

We're not making -- taking big steps in changing pricing.

So any change will be nominal, but it will be a trend downwards.

Most of the change downward will come really from the fact that DDA is growing as rapidly as it is.

I mean, the vast majority of our growth in the fourth quarter was DDA.

And that's really what's [wrong] with the cost of funds, not tweaking deposit pricing by a few basis points.

Right.

Yes -- and Florida.

Thank you.

Herman Chan, Wells Fargo.

John, you mentioned some pricing pressure in Florida in your earlier remarks.

It looks like loan growth has slowed in the state relative to the recent run in the rates.

Should we expect loan growth in Florida to lag somewhat relative to the performance in New York and the national businesses?

Well, I think it's only normal, given the size of the New York market, that it will -- we'll see more loan growth coming out of New York than Florida.

It's too early to say exactly what that ratio is going to look like.

But right now, we're just seeing -- we're seeing more opportunities for yield as well as volume in New York.

And it's natural.

I mean, it's a huge market and we know it very, very well.

And we are trying to be diligent in Florida.

Look, we understand that the Florida market is volatile.

It's been a boom-bust economy for 50 years.

And so we are being cautious.

But we're -- certainly there's no abatement of improvement of the local economy down here.

It's really quite remarkable what we're seeing and it's just not -- and it's not just in real estate.

So, I suspect we will see our fair share coming out of Florida as well this year.

I think, Herman, what you are seeing is a little bit of -- we have choices today that we didn't have a year and a half ago.

We can allocate capital a little better, being in two geographies -- in fact, with national, in three geographies.

So you are seeing us do some of that.

Florida is a smaller market and a more competitive market, and has become more competitive in the last year or so.

Banks that were not very active are now active.

So we see more competition here compared to just 12 months back.

So, at the meeting yesterday with our lenders and our retail people, and I reminded them that over the last four years, we've probably taken $7 billion worth of business away from our competitor banks in Florida.

And frankly, they're losing their sense of humor over that.

And so they're getting a little tougher by trying to protect their relationships.

And I suspect that will continue.

Understood.

And it looks like the residential mortgage purchase program continued.

Can you share your expectations on resi mortgage purchases in 2014?

Thanks.

From the second and third quarter to the fourth quarter, as you can see, we have taken it down meaningfully.

You should expect a similar level of activity over the course of 2014.

So, it's now about $170 million.

I would expect, give or take, around that level of activity.

Great.

Thank you very much.

(Operator Instructions) Brady Gailey, KBW.

Yes, just a follow-up.

John, private equity is now down to 21%.

I think from prior conversations with you, they're kind of done doing secondaries and they'll just kind of trade out of it from here.

I think they roll off lockup sometime next week, just with earnings being over.

How do you think private equity ownership kind of dwindles down from here?

We keep close to them, obviously, Brady, and have talked to them recently about their intentions.

And while you're right, we're probably done doing secondaries, I would expect to see them start thinking in the future about the possibility of some block trades.

But they have assured us and given us every indication that whatever they do, they will continue to do in a synchronized way.

So you shouldn't have to worry about stock getting dribbled out here over time.

And -- look, I don't want to speak for them, and I'm not sure what their investment positions are right now, but it's reasonable to expect that, over the next two years, that these guys get out of here, for the most part.

This is -- their time horizon is near the end.

But we expect that they will do nothing here that compromises the trading activity of the stock.

Okay.

(multiple speakers) As you're looking at a capital raise sometime early next year, I know it's kind of further out, but I mean, do you think that likely takes the form of additional comment?

Or do you think that you would raise like NCPP or some non-common form of capital?

And any idea roughly how much you would think about raising?

Brady, it's Raj, I'll take that.

It's too early for us to tell what form of capital we would raise because we're talking at least a year out, if not longer.

And market conditions, to some extent, will drive that.

But I just want to go back to your question that you asked John about the private equity guys.

And when you said dribbled out stock, I just want to make sure that we're clear.

I don't think private equity firms, in general dribble out, as in sell a few-thousand shares every day.

I think what they do, typically, is they will do an underwritten offering and it will be a block trade.

It might even be a secondary.

A secondary and block trade -- the only difference is one is marketed for a day and the other one is marketed for a night.

So, it will still be an underwritten offering.

It will not be calling their broker and selling 10,000 shares every day.

That's not how these things generally happen.

Yes, we talked to them about that, and they have always acted in the best interest of BankUnited since they've been part of our story.

And I have no reason to believe they won't continue.

All right.

And then lastly, another one probably for Raj.

Raj, the bond book continues to fall here.

It's around 30% of earning assets now.

Where do you think that ratio goes?

I mean, obviously, it will keep going down as you guys shrink the bond book and grow the loan portfolio.

But do you think bonds to average earning assets kind of bottoms around, what, 15%, 20%?

I would think so, in that range.

It's still a way to go to get there.

But I -- given the size of our balance sheet, let's say a year from today, if you're a $20 billion bank, you expect to see at least $2 billion to $3 billion, in that range, yes.

And remember, that's an amortizing portfolio, so a lot of what you see happening there is just natural amortization.

Right.

With the exception of CLO's that we sold (multiple speakers) --

Right.

^ -- most of the run-off of that portfolio is just regular run-off.

Okay.

Thanks, again.

Okay.

I find there's no further questions.

Okay.

Thanks, everybody, for tuning in.

We appreciate your having an interest in our story, and look forward to talking to you in 90 days.

Bye bye.

Ladies and gentlemen, that concludes the conference today.

You may now disconnect.