BankUnited Inc (BKU) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BankUnited, Inc. 2014 second-quarter earnings conference call. My name is Kathy and I will be your operator for today. (Operator Instructions).

As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Mary Harris, Senior Vice President Marketing and Public Relations. Please proceed, ma'am.

Good morning and welcome. It is my pleasure to introduce our President, CEO and Chairman, 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 reflects 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 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 other 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 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 ending December 31, 2013, available at the SEC's website, sec.gov.

I'll turn it over to John Kanas. John?

Good morning, everybody, thanks for calling in. Obviously we are very pleased with the recent quarter's results. We did $48.5 million, $0.46 a share and for six months about $0.99 a share.

We continue to enjoy the business climate in our two primary markets, New York and South Florida. South Florida getting a lot of publicity lately. As recently as yesterday there was a big article about Miami actually outlining some of the things that I have reported to you over the last three or four months.

So we see no abatement in the growth of both of these markets. The new loans for the quarter grew as approximately as we predicted just under $1 billion, $2.1 billion on a year-to-date basis. We have reported here last time that we would like to see loan growth start to come in in thirds, that is about a third in New York, and a third in Florida and a third from our national platforms.

And we pretty well -- we came as close to doing that this quarter as ever. $344 million in New York originations, and he learns, $305 million in Florida and then $322 million in a combination of the national platforms, which is a combination of residential mortgages and $177 million from our three lending subsidiaries.

On a percentage basis 41% Florida, 25% New York now and 34% national. In terms of categorization that would be commercial real estate loans for the quarter; new loans as of June 30, 41% were commercial real estate.

That includes owner occupies and multifamily. C&I at 41% -- C&I 35% and residential about 23%.

Asset quality continues to be stellar. 21 basis points of non-performers and 350% coverage of loan loss reserve covering the noncovered, nonperforming loans.

Deposits grew equally as well, a little over $900 million for the quarter as we had hoped. And that growth is coming in both in New York and in Florida.

I know there's probably a fair amount of questions on this call today given the earnings reports that have been in by other banks. And we are sensitive to your interest with regard to a number of different areas that other bank reports have given rise to. And we're going to take plenty of time today to answer any of those questions that you would like to hear.

I would mention before we even start that that we are getting, I believe, closer and closer to a time when we will start to see some activity in the consolidation of this particularly this mid-cap space. We saw a very interesting deal this week with OneWest and CIT, which we think makes a lot of sense. And our current belief based on conversations we have had with them are that regulators have a very balanced view toward consolidation of this sector and are beginning to realize and recognize that consolidation is a very important part of the mid-cap banks' future in the next year or two.

So we are cautiously but optimistic that we will see some more action in this area starting now. Raj, why don't you take over and talk about deposit trends --

Yes, as John said deposits grew equally impressive. As loan growth we had over $900 million of deposit growth this quarter and total for the year about $1.5 billion.

Deposit growth was a third of it was in New York, two-thirds of it was in Florida and now our total deposits exceed $12 billion. Our loan-to-deposit ratio is still a very comfortable 88% or so, a tad below 90%. So for the next few quarters expect us to grow deposits just a little under our loan growth.

Because we do want to -- we still feel we have room and we have some excess deposits. So the guidance is unchanged for the future.

Our deposits now, 25% DDA, 42% money market, 32% time deposits. We feel comfortable with that mix. Of course we want DDA to be even higher and we will keep working on that but we feel comfortable that the deposit mix of this Company has come a long way in the last few years.

The cost of funds, excluding hedge accounting and accretion costs, was 56 basis points, basically stable. Has been stable now for a couple of quarters and we expect this trend to be the same. The story will not be cost of funds, it will be growth to fund the loan growth that we are seeing on the left side of the balance sheet.

Lastly, from my side before I turn it over to Leslie, as you know we had a loss share agreement, which was a five-year agreement, expired in May. It was a great partnership with the FDIC and the agreement has ended.

We did sell a whole bunch of loans, though not the entire portfolio, but we did sell any loans we did not what to keep. And the loans that we did keep are pristine and the relationship that we want to grow, so it was a good partnership five years long.

The residential loan share is another five years so it will be 2019 before that expires. With that I will just turn it over to Leslie to get into the numbers a little more.

Thanks, Raj. The quarter was pretty much in line with our expectations, hopefully with yours.

We are, as we told you, we are seeing the impact on earnings of the runoff of high-yielding covered assets; net interest income in total being just slightly lower this quarter than the immediately preceding quarter, although modestly higher than for the comparable quarter in six months of the prior year. We expect over the next couple of quarters net interest income will be relatively stable and then start to trend upward.

Obviously pressure on NIM continues, a headwind that is being faced by the industry. NIM declined to 4.67% for the quarter due to the runoff of covered assets coupled with the competition that we are seeing in prices and the sustained low rate environment. Our guidance for NIM for the year remains unchanged.

As we disclosed to you at the end of last quarter, we have terminated our indirect auto lending business. We did decide this quarter to sell the indirect auto portfolio. That resulted in a positive all-in impact on pretax earnings this quarter of about $2 million, most of that in the form of the release of reserves that we were holding against that portfolio and the allowance for loan losses.

Also about $700,000 worth of termination and exit severance cost, that type of thing netted in that number. Other than that the reserve in the provisioning for the quarter corresponds pretty much to loan growth. Going forward we may see just a modest increase in provisioning as we move through the credit cycle but we are not expecting any material changes there in the near term.

We are not seeing any deterioration at all in asset quality. And we continue to reinforce our guidance that we expect core noninterest expense to run about 10% higher for 2014 than it was in 2013 and then more modest increases going forward after that as we have guided in the past.

And continue just to reiterate our expectation that over the next few quarters we are going to see a downward trend in EPS. That is nothing new. It is consistent with what we have been telling you.

But want to reiterate that that continues to be our expectation over the next several quarters and then we will see an uptrend begin. John, any comments you want to make (multiple speakers) before we open up for questions?

A slight decline in our cost of deposits, a very good number for growth of loans, solid credit quality. And given this environment we are very pleased with the quarter. And it's come in about exactly where we thought it would and what we had predicted.

I just want to make one observation. New York loans grew $344 million and deposits grew $300 million. So we are getting pretty close to where New York is self funding.

And of course national businesses do not generate deposits. Florida funds -- brings in deposits to fund Florida loan growth as well as national loan growth.

And one last thing is that non-interest bearing is now just about 20% of loans, which has been creeping up over the last couple of years and again slightly improving. A lot of that has to do with the growth of loans in New York. Having said all of that, we would like to start taking questions.

(Operator Instructions). Rob Placet, Deutsche Bank.

Hi, good morning. Just to start off, I guess anything in particular that drove the modest slowdown in loan growth this quarter? Is it just kind of lumpiness, or I was wondering if there was anything in particular?

No. We told you last quarter -- we told you what we thought we would grow this year for $4 billion to $5 billion. We still think that is true but some quarters will be a little overbilling, some quarters will be a little under.

We can't time precisely when these closings will take place. We are finding that, of course, and every other CEO that has reported this quarter will tell you the same thing, loan pricing is getting to be ridiculous because the competition for loan pricing can be ridiculous.

We certainly walk away from more deals based on price today than we ever do. Raj and I flew down on a plane yesterday and he was had been moaning the fact that we just lost -- what was that, a $10 million resi deal?

Yes.

The bid against us was 2 1/8 I/O for three years, or something?

Yes, we lost it by a very large number.

And we are losing to those kind of numbers in New York and in Florida all the time. There is a point beyond which we simply will not go to put up loan growth. And we are seeing that on average more than we ever saw it before.

We lost a big deal in New York, multifamily deal in New York the other day to somebody who went 10 years I/O on a 75% loan to value. We are just not going to do those things.

But having said that, we have a good pipeline going into the third quarter of loans that do meet our pricing requirements. And our average -- our prognostications are for loan growth remain the same.

Okay, great. And then just secondly, securities balances increased fairly meaningfully this quarter. Just curious if you could talk about that and just kind of the outlet for that portfolio going forward?

So that's two things -- three things. One, we sold the indirect auto portfolio, so we had kind of a sudden inflow of cash towards the end of the quarter. It's an attempt on our part to effectively put cash to work, have liquidity somewhere other than just at the Federal Reserve Bank earning a little bit better yield than that.

So that's really what that is and the lumpiness in loan demand, as you saw, or loan closings. Loan closings were down a little bit for this quarter compared to the last quarter, so we put some of that into the bond portfolio. I would expect over the near term, the next few quarters the securities portfolio to remain pretty stable, about the number you are seeing today.

Okay, thank you.

Brady Gailey, KBW.

Hey, good morning. The margin guidance of 4.25% by the end of this year seems to be -- you guys are kind of right on track there. Do you care to take a stab at as we get closer to 2015, do you care to take a stab at what the margin will do in 2015?

Not really.

Do you care to take a stab at what the Fed is going to do?

Down.

We may have some guidance with respect to that later in the year. But right now I think anything I would put out there would be a little bit too presumption laden and speculative.

Okay, that's fair. And then the tax rate, I know we had some change in the tax code down in Florida.

The tax rate was 33% in the second quarter. Is that a good run rate kind of from here on out?

I think that's a good run rate for 2014. I think probably it will be a little bit higher in 2015.

We did take advantage of some opportunities on state taxes this year. So I think it will be a little bit higher in 2015 but it is certainly a good run rate for the rest of this year.

Okay, and then on the deposit growth, you grew almost $1 billion. That's more than you have ever done before. Is there anything specific that drove that, or is it just more you all are getting more traction?

We did run a strong campaign this quarter. We spent a little more on marketing than we usually do to see how much -- how far we can go.

I think we probably overshot a little bit than what we had set out to achieve. And, like I said, before I think we want our loan deposit ratio to edge up a little more, use a little more FHLB. So expect deposit growth to be just a little behind loan growth for the next couple of quarters.

And also, Brady, deposit growth in New York follows the loan growth and we reported that to you before. We have a lot of deposit growth in the pipeline in New York that comes as a part of these relationships that we are gaining in New York. And they are not -- they don't come in simultaneously but I think you can expect to see more of the same.

Okay. And then lastly, we started to see earnings actually the EPS come down like you all have been talking about and you are saying there is another two or three quarters of decline in EPS. Do you think that quarterly EPS stays north of $0.40?

I'm not ready to take a stab at that. There are too many variables I think between here and there. But we stand by our estimates for the year but to start guessing on a quarter-to-quarter basis is probably not something we want to do.

Okay, that's fine. All right, thank you guys.

Ken Zerbe, Morgan Stanley.

Great, thanks. Good morning. John, maybe first question for you.

Have you had any direct conversations with the regulators that would actually give you confidence in your statement that M&A actually could start picking up? Because we have heard that in the past, I just want to make sure there we are not, not from you, but I just want to make sure that were not getting overly excited because we saw one deal gets done and then 12 months down the road find out that the deal still can't close. And -- just wondering what gives you -- go ahead.

We, like most mid-cap banks, are talking to the regulators nearly on a daily basis, certainly on a weekly basis. And so the comments that I have made are a result of specific conversations we've had with regulators that lead us to believe that they are very conscious of the fact that consolidation in this area is inevitable and that their view towards consolidation is very balanced right now.

There was a time, and I think I reported it to you probably a year ago, when I said that I thought that the fear of regulatory oversight and intrusion might have been standing in the way of some people trying to do a deal. I can tell you that we don't feel that way anymore based on what we are hearing the regulators say.

I think they are being very realistic and, yes, those are based on face-to-face conversations we are having. I think that we are going to finally start seeing some action in this space and I think that the regulators, they are certainly not encouraging consolidation. But they are certainly not discouraging consolidation at this point.

And is that -- because it feels like just a month or two months ago it felt like they didn't want M&A to get done at all. Are these conversations, has it materially improved in the last month or so, or is this just a gradual improvement over the last six months?

It's a gradual improvement but there is a noticeable change, I think, a noticeable change in the last three or four months. I think that -- look, people are beginning to understand -- all of the pundits around this industry are beginning to understand that this is a very difficult time for banks, that a lot of the earnings growth that the industry has seen in the last six quarters have been driven by reserve releases and expense reductions and that game is over.

And if interest rates stay where they are, or if by the way God forbid short-term rates rise and long-term rates don't, that there will be increasing pressure on the industry. And particularly the mid-cap space. And I think regulators our understanding that that is a likelihood and that then consolidation becomes the obvious next step and I for one am encouraged by recent conversations we have had.

Got it. Okay. And then one question for Leslie.

I think I heard you say that the NII should be roughly stable. I assume that's from the $169,000 number? Does that also account for the runoff of the portfolio with the zero carrying values?

Yes, it does.

So all in $169,000 roughly going forward? Okay. All right, thank you much.

David Bishop, Drexel Hamilton.

Hey, good morning, guys. Hey, just wondering there has been obviously some press about the effects of the Rent Control Bill being passed in New York City. John, I was wondering if you could give us some commentary on what you are seeing, if that is having any sort of sobering effect on the multifamily market and any impact so far?

Yes, no question it is a topic of great discussion. The mayor has made comments that are certainly not positive toward that subject. But we continue to believe based on conversations we have with our borrowers and with the big developers in New York that while that is a consideration, this is not something that is going to be -- that's going to make a fundamental change in that multifamily market in New York.

What we are seeing this administration do as an example, we have seen some specific cases where a developer goes in and he wants to do a development plan somewhere in the boroughs or New York. And he wants and 80/20 split of low income to the project and the city puts a lien on him and they want to go they would like to see 30% low income.

But at the same time we have seen them negotiate higher density and more units on the same property. So it seems to be balancing itself off pretty well in these negotiations so far.

With regard to rent control, it's a subject we could postulate about forever. But it certainly seems to be having little or no impact on values in that market or on activity in that market so far. And I think -- I don't think there will be a substantial dislocation here as a result of it.

All right. And then maybe a question Leslie. Maybe update us -- maybe how you are standing asset sensitivity, rate shock positioning has changed inter-quarter?

Really no material change. We continue to run the bank with interest rate risk at a very low level. We have never taken a lot of interest rate risk.

Nothing has changed about that. We've extended a little on the liability side but that is more in response to what we are seeing on the asset side. Pre-loans tend to be more three- and five-year fixed rate product as opposed to floating-rate product.

So that has really been just to maintain the position where we are. The duration of the bond portfolio is still low. So on balance I don't think there really hasn't been any material change in our interest rate sensitivity position.

Got it. And then, John, maybe one more question.

I think you alluded to in the preamble regarding some of the regulatory discussions out there, we have seen some of your peers come underneath the purviews from the BSA/AML Act, a little bit more focused there. What are you hearing from your regulators? How are you feeling in terms of your position in terms of your systems and compliance on the BSA/AML side?

This is the hot button subject of all regulators these days. And obviously all banks are having to pay a lot of attention to this issue including us.

We are very comfortable with our AML/BSA compliance. Regulators are in constantly looking at that, at our institution and every other. And we are very comfortable with where we stand on that subject.

That and other compliance issues tend to be the hot buttons that stand in the way of consolidation. The regulators have made that clear publicly to the industry. And so I think a lot of people including us are paying a lot of attention to the subject especially in light of the MMT situation that sort of took everyone by surprise.

With regard to our situation, we have spent a lot of money in that area and other areas of regulatory compliance. This is a rapidly growing institution.

As I have told you before we get a lot of regulatory attention because of that. And we have had to invest very significantly over the last three or four years in that area and all of the other compliance areas. So we are comfortable going forward.

Great. Thank you.

David Darst, Guggenheim Securities.

Good morning. John, based on the volume of production you are doing in New York and in your comment about bringing deposits along with the relationship, it does sound like you are differentiating your business model away from the solely brokered multifamily market. Can you give us any context just in maybe the rate advantage you think you are seeing, or maybe the average loan sizes that you are doing that are different?

We compete against all kinds of institutions in New York. Some of them really specialize in unitary products. They will just do a very simple basic multifamily loan that cash flows on its face.

We, because we've got 35 years experience in that market with some of the largest landowners there, we seek to try to find opportunities where we can make loans. As an example, a building that is not cash flowing at the moment, guy buys a new building, doesn't cash flow, he needs to invest money. We will make a loan on that property based on the strength of the borrower and the ultimate value of the property and we can get a little bit more interest rate on that property.

So some of these are not straight multifamily buildings, they are mixed use, they might be partially commercial buildings and partially multifamily. They might be in the boroughs instead of in the heart of Manhattan where pricing is a little less intense. But having said all of that, in no way is rate competition easy in any of those types of situations.

We are seeing vigorous competition from more and more institutions coming into New York. It's one of the reasons why we said this a long time ago, we want to make sure that we spread the risk, if you will, in this loan portfolio between Florida, national and New York.

We really want to keep an eye on all of these markets -- both of these markets -- so that we don't have to be overly dependent on anyone of the other. There are times -- it seems to be cyclical -- there are times when rate pressures in Florida are greater than they are in New York and there are times when depending on the products it is greater in New York.

Right now it's tough in both markets. But as you can see because we are so small and we are in such very very large markets, both North and South, there is plenty of room for us to grow loans that fit into our criteria.

Okay. Leslie, was there any real change in the yield relative to what rolled off from the indirect auto and what you added in the securities portfolio?

Actually they were pretty comparable interestingly enough. The average yield on the securities portfolio is just about, is very close to what the average yield was on that indirect auto portfolio.

Which answered the question as to why we get rid of the indirect auto portfolio.

Why we got rid of the indirect auto portfolio. But anyway. So that is not going to have -- that didn't really have a meaningful impact on the margin one way or the other.

Okay. And what about just expenses going forward. Were there any savings from indirect and is this 11% growth rate a good one?

I think that, yes, there are some savings but I think not enough to move the needle on the guidance we have put out there about the increase in operating expenses.

Okay. Got it. Thank you.

(Operator Instructions). Gerard Cassidy, RBC.

Thank you. Good morning, guys.

John in the past you have talked about some of the opportunities that you have had in New York on the deposit front, you and Raj said this, regarding the bigger banks maybe pushing some of their customers out due to the LCR and SLR requirements. In the deposit growth you saw in New York this quarter, did any of that come from winning over those bigger commercial-type customers?

No, not specifically this quarter, Gerard. But the trend is clear that the larger institutions are getting more and more discriminating about the deposits that they want to keep. It has been made clear I think for the industry that LCR will apply to banks, I guess it's $100 billion --

$50 billion and over. And the $250 billion and over is 100% LCR.

Yes, but it is phased in over --

Correct.

Over a period of two years --

So we will continue to be the beneficiary of the fact that some of these accounts are great business for banks like ours. And I think we will benefit more and more as the quarters go by, but there is really nothing in this quarter yet of significance --

They are in no hurry to do it until they have to.

Yes, right.

Leslie, you were asked about asset sensitivity. If we -- some of the banks are giving us a 100 basis point parallel shift, the yield curve goes up by that much it would increase net interest in the new by X, do you guys have any of these numbers that if we did see a 100 basis point increase in the yield curve what that would do to your net interest revenue?

Yes, Gerard, we usually put that out in our Q. So that will be coming out in a couple of weeks, but we focus a little bit more on a 200 ramp as our standard measure. But any parallel shift in the curve will have a modest improvement in net interest income.

It won't be dramatic because as I stated before we manage interest rate risk to a pretty low level. We are not betting on rates. But there will be with any parallel shift in the curve some increase in net interest income and we usually put those numbers at in the Q.

Great. And then just finally, John, coming back to your thoughts on what you are sensing from the regulators regarding M&A. What are some of the -- do we kind of come back now to trying to figure out what banks want to sell?

Does it does come down to price, or is it compensation of the senior management team leaving on the seller that plays into it? Can you kind it give us some color on what you recall in the deals in the past, what you needed to do to get people to sell out?

You and I have talked about this before and a lot of the other people on the call and I have talked about this. I think probably you can use all kinds of science here and you can look at the institutions 100 different ways to try to gain the answer to that. Probably the simplest thing is figure out the age of the CEO.

Right.

That seems to be the major determinant, or at least it has been in the last 10 years. But I think that you are beginning to see in this quarter, and I believe you will see in future quarters, pressure on institutions as they run out of rope here with releasing reserves and reducing expenses.

And I think that more and more people are beginning to think sensibly about this. Almost every bank CEO you talk to today says he is a buyer. Well that can't be true.

They are not all buyers and we think that over the next few quarters when the tide goes out we will figure out who really is a buyer and who is a seller. But it is an art rather than a science trying to predict what you are talking about. I think that you just apply simple economics to some of these companies and you can figure out who has got a future in the business and who doesn't.

Do you think potential sellers are being more rational on valuation and prices? Obviously prices are down meaningfully from pre-crisis and many of the deals that have been done in the last two years have been very small but the prices have been relatively low. Do you think the mindsets of these potential sellers has been ratcheted down to the current environment?

I don't think so. Not yet. We are hopeful that it eventually will.

I think the market has to do that for us. Right now the market, particularly in the mid-cap space, is treating most institutions equally. The relative prices, book multiples and the earnings multiples are pretty similar from institution to institution regardless of performance, or the market or the hopes for future of that institution.

So I think the market is going to have to start differentiating first. And that may get people thinking differently but if you are running a bank that is selling for 1.8 times or 2 times book and you don't get any pressure from anybody whether your performance is good or bad, there really isn't any impetus to change one's life, or one's world. So we continue to be hopeful that the day will come when the market differentiates these companies.

Thank you. Appreciate your color.

I would now like to turn the call over to Mr. Kanas for closing remarks.

Appreciate your interest in the Company. It is business as usual down here. We are -- I can't overemphasize the degree to which we are seeing an economic recovery here in Florida that seems to have legs and sustainability.

As we mentioned earlier, there was an article in the Wall Street Journal yesterday just about specific pieces of property along Brickell. And we are extremely familiar with all of the developers in that area and what is going on. And I can tell you that Florida is back and there is significantly less leverage in this market than was here in 2004, 2005 and 2006.

So we think that it's a healthier return to this level. New York continues unabated. The growth there out over the next year or two looks very impressive.

Our customers have never been in better shape in terms of their own liquidity and now if we had net interest margin the world would be a great place. So I think you can expect more of the same from this Company as we go forward enjoying the relative health in these two markets. And we look forward to coming back to you in three months and giving you that report.

Anybody else? Raj?

I'm good, John. Thank you.

I'm good. Thank you.

Thank you for your participation in today's conference. This concludes the presentation.

You may now disconnect. Thank you.