BankUnited, Inc. Q2 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the BankUnited 2021 Second Quarter Earnings Call. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Greenfield, Corporate Secretary. Please go ahead.

Thank you, Victor. Good morning and thank you for joining us today on our second quarter results conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer and; Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain 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. Any forward-looking statements made during 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, including without limitation, those relating to the company's operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-19 pandemic. 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 the forward-looking statements. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31st, 2020 and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website, www.sec.gov. With that, I'd like to turn the call over to Raj.

Thank you, Susan. Good morning, everyone. Thank you for joining us and giving us your time to listen to our earnings report. So for the quarter, our earnings net income came in at $104 million, $1.11 per share, compared to $98.8 million or $1.06 per share last quarter. For the full year, for the first six months of the year, that translates to an ROE of 13.2% and ROA of 115 basis points. We're very happy with where things came out on the earnings front. NII, net interest income, continued to grow, despite tons of liquidity on the balance sheet, which I think is a problem with every bank these days. Our NII came in at $198 million, last quarter it was $196 million, and this quarter last year it was $190 million. NIM contracted a tiny bit from 2.39% to 2.37%, mostly because of that elevated level of liquidity that I just mentioned. The deposit front, again, a very strong quarter. Deposit costs came down, the mix improved, and the volumes grew, so across the board, no matter how you measure it, the story of the deposit side was again very, very strong. Our cost of deposits dropped from 33 basis points to 25 basis points in the last quarter, that's an 8 basis point reduction. The spot balances, DDA grew by $869 million, and most of our growth was in DDA again. DDA now stands at 31% of deposits compared to 25% just at the end of last year. For those of you who have followed our story for some time, you know, even as recently as a year or a year and a half ago, we used to think of 30% as promised land, I'm happy to report more than 31%. But that doesn't mean that we're not shooting for a higher number. I think the bar just has been reset. And we think we can actually get the improvement of the funding mix even beyond this 31% that we're at today. Provision for credit losses came in at negative $27.5 million. On the credit front, we've seen lots of progress. Criticized and classified actually just dropped by $541 million, that's a 21% drop. Loans that were either temporary, deferred, or modified under the CARES Act also declined. They were $762 million last quarter and now they’re $497 million. Our NPL ratio, however, went up a little bit, from 1% of loans last quarter to 1.28%. If you exclude the guaranteed portion of SBA loans, that number is at 1.07%. This increase is largely attributable to one large credit, a $69 million relationship with the C&I business here in Florida. It's a relationship we've had for almost a decade. A number of accounting irregularities came up over the last few weeks in the books of this business, which is why we took a stand of holding this to a non-performing loan and taking a large reserve against it. We have a $30 million reserve against this loan. Capital-wise, we have tons of capital, we've announced a share buyback back in February, which is still outstanding by $37.7 million, and the board met yesterday and approved another $150 million on top of what was already left in the last authorization. Over the last couple of earnings calls, I've mentioned that the stance we've taken with buybacks is that we will be more optimistic rather than just steady by a little bit every day. The reason for that is we expect this to be a very volatile market. Even a little bit of bad news and good news can really move stock prices a lot, which is what we're seeing right now. CET1 capital is at 13.5%, HoldCo at 15.1% at the bank. Our book value continues to grow; book value is $33.91 now, tangible is $33.08. We are back in the hiring business after what has been the longest hiatus we've ever had. Our product and producers on both sides of the balance sheet across business are exciting, which we haven't done for a full year. We launched a new organized business line. We've made a couple of hires, and those will be starting soon. The economy is healing both in New York and Florida, with Florida further ahead than New York. We will soon be back to the new normal by Labor Day, with employees returning to a hybrid working arrangement. We are beginning to think about looking outside just New York and Florida, considering other markets where we could expand. But with that, I'll turn it over to Tom.

Great. Thanks, Raj. So let's talk a little bit about the deposit side. First, overall average non-interest bearing deposits grew by $673 million for the quarter and by $2.9 billion compared to the second quarter of 2020. On a period-end basis, non-interest bearing DDA grew by $869 million for the quarter, while total deposits grew by $877 million. NIDDA has now increased 26% on a year-to-date basis. We've seen strong growth from new relationships coming into the organization, with fee income lines up 31% in terms of service charges. Time deposits declined by $806 million, while money market and interest-bearing checking grew by a total of $815 million. On the loans side, excluding the PPP loan forgiveness, we had a decline of $56 million. Residential growth was $494 million for the quarter, and C&I loans were up by $186 million, which is a good sign for us and shows strong growth in one of our major business lines. We expect to see growth for the second half of the year. We've had $225 million of CRE run off, which is tapering off, and the multifamily New York portfolio has now stabilized. Overall, we're seeing strong rebound in tourism, especially in Florida. During this quarter, only $3 million of commercial loans are now on short term deferral as of June 30th. We've seen significant improvements in collections and the hotel market in Florida is coming back strong, similarly for the overall occupancy rates. So with that, I'll turn it over to Leslie for some more detail.

Thanks, Tom. As Raj mentioned, NIM was down slightly this quarter to 2.37% from 2.39% due to high levels of liquidity. Cash is elevated and liquidity was deployed into the bond portfolio, which is not accretive to the margin. The yield on loans this quarter increased to 3.59% from 3.58% last quarter, and we've recognized fees on forgiven PPP loans that added to that yield. Total cost of deposits declined by 8 basis points quarter-over-quarter. We estimate that if we normalize elevated cash balances, that accounts for about 8 basis points of impact on NIM. Moving on to the provision and allowance, overall the provision for credit losses this quarter was a recovery of $27.5 million. The reserve declined from 95 basis points to 77 basis points. The largest impacts were improvement in the unemployment outlook and commercial property forecasts. Total criticized and classified loans declined by $541 million, special mentioned down by $282 million. Regarding operating expenses, we saw a decline in compensation this quarter as expected. I would expect the tax rate to remain around 26%. We have entered discussions with the State of Florida regarding several outstanding tax matters. With that, I'll turn it over to Raj for some closing comments.

While Leslie was talking, I just looked up on my deposit report. As of last night, our deposit costs were at 20 basis points, so I feel pretty comfortable saying that we will be in the teens this quarter, possibly as early as next week. I'm happy to report that we’re further ahead on deposit growth. Truth be told, while I'm very excited about deposit growth, liquidity is a problem. This would have been an even better report if we could have kept deposits flat. On the loan front, we're further behind than we thought we could do. I still see a lot of good news on the deposit front, as there's still good money coming in and costs are declining further than we ever thought. On the loans side, pipelines are beginning to look normal and overall, I remain optimistic moving forward. With that, we'll turn it over to the moderator for questions.

Liquidity has been challenging, and this report would have been stronger if we had maintained flat deposits. In terms of loans, we are lagging more than we anticipated. However, I'm encouraged by the positive trends in deposits, as we are still seeing a good inflow of funds and costs are decreasing more than expected. The loan pipelines are starting to normalize, and overall, I stay optimistic about the future. Now, I will hand it over to the moderator for questions.

Yes. Okay, we'll take questions.

Our first question comes from Ben Gerlinger from Hovde Group. You may begin.

Hey, good morning, everyone. I was wondering if we can start on Slide 23, it's the non-performing loans. A big uptick, I completely understand that it's due to one major C&I credit. But if you back that out, the quarter looks to be roughly flat. And as Tom worked through the credit information, it seems like everything is positive and working in the right direction, so I was curious if you could shed some more color on non-performing loan balances in general. And it sounds like this credit you guys called out seems to have a $30 million reserve, which is pretty high as a percentage of reserve relative to the total loan. I was just curious if you could shed some color on your confidence there in terms of this SNIC and performing going forward.

On that loan, we are still capturing a lot of information. We will know a lot more in about two weeks' time about the collateral coverage. We took a conservative and appropriate level of reserve. We'll know more in about two weeks, but this situation stems from accounting irregularities, making it more challenging to understand the extent of the problem. This falls outside of normal credit losses and more into what might be termed a fraud loss. Overall, we're valuing collateral appropriately. Regarding the rest of the non-performing loans, for the most part, the population has remained stagnant, and we are hopeful it will gradually start to wind down.

There's nothing really that stands out other than that one loan.

Okay, great. That's really helpful color. And then if we could switch gears, Raj, you seem pretty optimistic about loan growth. Can you frame what your loan growth targets might be for the end of this year or even a year from now?

For this year, the trajectory in the first quarter we were down $0.5 billion, and this quarter we were down about $50 million. I'm expecting the next two quarters to be positive. In the past, we've said we'll likely have low single-digit growth. It is hard to predict in this environment. For the next two quarters, I expect them to be positive and that should help us make up for what we've lost in terms of balances. My optimism comes from seeing the environment and pipeline activity across the board.

There were key indications in our production and the pipelines we're seeing are looking good right now, indicating strong activity. We expect to see more transactions.

I would anticipate that our operating costs will see upward pressure due to hiring, but this hiring should also lead to increased revenues, offsetting the costs. Overall, the compensation and variable compensation accruals are expected to rise due to anticipated strong second-half performance.

Thank you, guys.

Our next question comes from the line of Jared Shaw from Wells Fargo Securities. You may begin.

Hey, good morning, everybody. Maybe sticking with the loan growth outlook, is the strength there on the C&I side driven by new customers or specific industries? Any color you can provide?

We're still being cautious on credit, but mostly it's coming from a healthy economy in Florida and a rebounding economy in New York. It's about driving business relationships in those areas to enhance our loan portfolio.

When I looked at the closing production for the quarter, we saw strong diversity across industries, with no two deals in the same sector, which is a very positive sign for us.

There is an opportunity for credit in the HOA business as we organize a separate line of business around it, which presents growth opportunities moving forward.

And when you talk about looking at other geographies, how should we think about entering those markets?

It'll likely be similar to our prior expansion strategies—gradually entering markets with small teams rather than through acquisitions, but we are engaging teams in various markets to analyze opportunities.

Great, thank you. That’s all I have.

Our next question comes from the line of Dave Rochester from Compass Point. You may begin.

Hey, good morning, guys. I wanted to get your take on the loan trajectory, especially with regard to multifamily runoff and bridge loan book. Where do you see that trending?

We expect the franchise finance will trend down further, but stabilize as we clean up several concepts, while the equipment finance side also has less transactional opportunity right now. Overall, we expect a gradual decline in the bridge book, but looking forward to potential growth opportunities.

I agree, we're seeing stability in the multifamily portfolio after what has been a challenging period, and we expect to continue seeing positive impacts from sales and revenue growth as the overall economy improves.

Regarding excess capital, we have substantial capital reserves available, and the board will consider further stock buybacks following the completion of current programs, reflecting our strong capital position.

We are open to further programs if the capital allows, while ensuring that we do not overextend ourselves. The market conditions and stock valuation will also guide these decisions.

Great, thank you very much.

Our next question comes from the line of Brady Gailey from KBW. You may begin.

I wanted to ask just another one on the C&I non-performing loans. What sector was that? And when you look at your total loan portfolio, can you remind us what percentage of total loans are sure national credits?

The major C&I credit is in the retail and wholesale distribution of commercial heavy construction equipment in the Southeast. We have a longstanding relationship with this company, which has made this situation all the more impactful.

The definition of a SNIC is over $100 million in total credit commitment with three or more banks. This specific loan doesn't fit that profile as it represents a relationship we have known for a long time.

Okay. And then Raj, you mentioned you're back on hiring staff. How many people did you hire in the second quarter, and what's your outlook for future hires?

We brought in about six or seven individuals during the quarter. Future hiring depends on available opportunities, and we're always on the lookout for top talent.

Great, thank you all.

And our next question comes from the line of David Bishop from Seaport Research. You may begin.

Just curious about how the balance sheet looks from an interest rate sensitivity position.

The balance sheet remains moderately asset sensitive. It is probably a little more asset sensitive than it was a quarter ago, but within the same range.

In terms of loan floors, how much do rates have to rise before we see some loans coming through their floors?

It's not a significant impediment for much of our loans, except for the mortgage warehouse book, which has some meaningful operative floors.

Raj, can you comment on your view of New York multifamily properties?

The New York multifamily market remains challenging, and while it's stabilized, substantial growth is not expected in the near future. This market is difficult as we compare against competitors with different ratings and strategies.

There are regulatory changes that have impacted the economics of this asset class, which has created a more challenging environment for growth.

Overall, while we maintain this asset class, we remain cautious on large-scale growth in New York multifamily properties.

In terms of providing for loan growth, we are likely to move towards a 60 basis point level, depending on continued upward risk rating migration and the nature of our production.

Thank you, everyone for joining us today. We look forward to speaking with you again in three months. Stay safe. Bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.