BankUnited, Inc. Q2 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the BankUnited 2022 Second Quarter Earnings Call. At this time, all participants are in listen-only mode. After the speaker's 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 to your speaker today, Susan Greenfield, Corporate Secretary. You may begin.

Thank you, Latonia. Good morning, and thank you for joining us today on our second quarter 2022 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 external circumstances outside the company’s direct control. 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 31, 2021, and any subsequent quarterly reports 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. Welcome, everyone. Thanks for joining us. You've seen the earnings release. We announced $65.8 million of net income this morning for the quarter, $0.82 a share. That compares to $0.79 a share for the previous quarter. I'm very happy about the numbers. Really excited about loan growth, which came in very strong at $780 million, excluding, of course, a PPP runoff. More importantly, of that $780 million, $553 million was in the commercial segments. Very healthy and broad-based growth. On the other side of the balance sheet, average non-interest bearing deposits grew $370 million, though period-end there was a decline of $80 million. If you remember, at period-end, there's always noise in our numbers. Last quarter, we mentioned a couple of hundred million dollars came in on the last day of the quarter and left on the first day of this quarter. If you adjust for that, we still had deposit growth, which I'm happy about. In this environment, to grow deposits gets harder than it was a year or two ago. We're happy with the way the teams have performed, and it's very much in line with our expectations and the guidance we've given you. Margin expanded even better than we thought. It is at 253 basis points, up from 250 last quarter. To remind you, the second quarter of last year, I think we were at 237 basis points. So, very nice trajectory; net interest income grew $16.8 million, which again, we're happy about it. The rate environment is changing rapidly. Deposit pricing, as I said in the last call, bottomed out in the first quarter and now will keep increasing at least until the Fed stops. Our deposit price averages at 30 basis points for the quarter, it was 17 last quarter. Overall, margin expanded because, of course, we're benefiting from the Fed moves. Credit, again, nothing but good news. Criticized classified loans again declined by $181 million this quarter. I believe last quarter, it was roughly $150 million. Non-performing loans also declined, excluding the guaranteed portion of non-accrual SBA loans; our non-performing loan ratio now stands at 42 basis points. Charge-offs came in at 23 basis points. To put it in perspective, last year, we ran at about 29 basis points in the full year. Capital, as we've said many times in the past, we will be opportunistic; when we see weakness in our stock price, we will lean in and be more aggressive with our buybacks, which is exactly what we did last quarter. We announced and largely completed a $150 million authorization. For the year, we've now bought back $326 million of stock, approximately 10% of our market cap. We think this is a good opportunity to step in and be aggressive, and we were. Regarding guidance, I think we're going to stick with all the guidance we've given you regarding loan growth. We see pretty decent pipelines, like what we saw this quarter. I fully expect that trend to continue next quarter and the quarter after that. In terms of margin, we're sticking to our guidance. Margin should expand from where it is. We're happy it expanded as much as it did. We remain optimistic about that as well. Leslie will talk about expenses later, but we’re happy where we came out. No real change to our guidance; we still remain focused on growing deposits. At the end of the day, the long-term single driver of success is to continue to bring in core commercial deposits, and we're executing on that. Overall deposit growth will be lower than our loan growth. We've said that loan growth will be in the high single digits, and deposit growth will be in the low single digits. So, we're not changing any of that. In terms of the environment, I usually start my comments with that. Let me do that before handing it over to Tom. We're in uncertain times, but I take a somewhat optimistic view. Actually, this is a definition of getting older. I'll recycle a joke that I've probably told you many times. The optimist and the pessimist walking down the street, and the optimist says to the pessimist, 'Look around you, life couldn't get any better.' And the pessimist replies, 'Well, that's exactly what I'm afraid of.' That's the environment we're in. Beauty is in the eye of the beholder. If I look analytic about it and say, where do we fall on that optimism-pessimism spectrum – one being totally pessimistic and ten being totally optimistic – we’re somewhere in the six to six and a half range. That’s the average view of the management team. There are opportunities, and we're cautiously optimistic. There are signals from Wall Street of trouble that might be ahead, maybe six months down the road. We will monitor that carefully and adjust our attitude accordingly. But right now, I see slightly more optimism than pessimism. However, we're being careful. Loan growth is strong, margins are better than we've seen recently. We had an event three days ago in New York with our top clients, and we had about 60 participants. Overall, they seemed more optimistic than I am. So, there are concerns about the economy, but also opportunities we can tap into in this environment. So, cautiously optimistic, and all those opportunistic. That's our stance, with that, let me pass it over to Tom. He'll get a little deeper into the numbers.

Thanks a lot, Raj. Maybe before we dig into the numbers, a few comments on Raj's view of opportunities and investments we've made over the previous quarter because the second quarter was pretty busy in terms of activities from a growth initiative investment perspective. We've talked before about both the Dallas and Atlanta offices. I'll start with Atlanta, where our goal is to have a full wholesale banking team, both from a corporate banking and CRE to treasury management perspective. We're probably about halfway through the hiring process there. We've built out the corporate banking team fairly well. At this point, we've appointed a CRE leader and are recruiting other members of that team. We're also working on the treasury management position and some credit support. Overall market reception has been really good, and we've started to book new relationships. The pipeline for business in Atlanta and the opportunities we're looking at are matching our expectations when we talked about entering this market. We're happy with that. Our Dallas branch is up and running, and we're seeing good deposit activity from our business operations in the Texas market. Texas continues to be a strong growth opportunity for us in the future. Beyond that, we've made several different investment position hires in the second quarter that I think are notable. We brought in a head of a sponsor finance team. We had never had a specific initiative to focus on sponsor finance relationships, and we've done that. We're happy with our early traction in that area. We've added a position to focus on environmental enhancements and alternative fuel opportunities within our client base. We're excited about that opportunity. We've also bolstered our commercial banking team in the Jacksonville market, as we like the growth opportunities there. Our wholesale team has performed well in Jacksonville, predominantly focusing on corporate banking and CRE, so we added a commercial banking segment to that area as well. We've added to our New York commercial private banking team. We've also increased our HOA teams during the quarter and brought in an experienced salesperson on the deposit side to focus on multinational relationships in the Florida market, which is significant for us. Overall, we had a strong quarter in terms of investing in the areas where we see opportunities in the economy, both from an industry segment and geographic perspective. Regarding some numbers that Raj articulated earlier, total loans grew by $780 million. For the quarter, the majority of that growth occurred in the commercial segment which grew by $553 million; this includes core C&I and mortgage warehouse business. Commercial growth was primarily led in the C&I segment, with $474 million of growth while the mortgage warehouse saw $116 million of growth. In terms of commercial growth this quarter, commercial and industrial segment commitments grew by 7.5% for the quarter; loans grew 6.9% year-to-date, while that line item has increased 13.2%. We've witnessed really good growth in all segments flowing into the C&I area, predominantly led by corporate banking, with strong performance in commercial banking and small business lending. Growth has been broad among industries that we serve, with no single industry dominating. If you look at the additional supplemental information and compare it to last quarter, you'll see growth occurred across various industries. The growth was largely driven by new business; our overall line utilization has remained pretty flat from a C&I perspective. Even the growth in the mortgage warehouse business is at pretty historical low points and utilization on those facilities. It's fundamentally a new business-driven kind of quarter from a C&I and mortgage warehouse perspective. CRE declined slightly, remaining nearly flat for the quarter with a $26 million decline. A couple of large transactions we were anticipating closed after the quarter ended. In the CRE book, we have seen solid growth within the industrial segment, which expanded by $180 million for the quarter. We have also begun to selectively focus on construction lending, which grew by $37 million in the quarter. Overall, we had about $145 million of growth within the CRE segment in some specialty segments we're keenly focused on. Regarding other areas, Bridge declined somewhat, which we anticipated, particularly in the Franchise Finance area where we're cautious given risk-adjusted returns. We noted some growth in the Pinnacle portfolio during the quarter, and residential grew by $228 million during the quarter. Overall, it was a strong growth quarter, and as we head into Q3, pipelines in all areas remain robust, maintaining the levels observed in Q2. So we're pleased with what we're seeing within the book regarding the pipeline. Consistent with previous guidance, total deposits and total non-interest bearing deposits were steady quarter-over-quarter, while average non-interest bearing deposits grew by $371 million for the quarter. As you may recall from last quarter, we pointed out about the $200 million Raj mentioned, which was fairly fast-moving money at the end of last quarter that we expected to run off. Factoring that in, we continue to be pleased with non-interest bearing deposits for the quarter. We continued to witness strong new logo growth within all our lines of business, resulting in a successful quarter from a new relationship perspective. Our loan-to-deposit ratio ended the quarter at about 85%, a level we are comfortable with at this time. With that, we'll turn it over to Leslie for more detailed comments about the quarter.

Thanks, Tom. We're very pleased to report that the net interest margin increased to 263 basis points this quarter from 250 basis points for the prior quarter, largely on the strength of increasing earning asset yields. The yield on the investment securities portfolio increased to 212 basis points from 173 basis points; given the short duration of the portfolio, we're seeing the impact of rising rates and widening spreads on the overall portfolio yield. The yield on loans increased to 359 basis points from 336 basis points last quarter, and the resetting of coupons on variable-rate loans and new production at higher rates contributed to that increase. The cost of total deposits was 30 basis points for the quarter, up from 17 basis points last quarter; again as the Fed continues to hike rates. Slides 9 and 10 of the deck provide more details about the allowance for credit losses. The reserve, as a percentage of loans, was flat to the prior quarter at 54 basis points. I want to point out that the ratio of the reserve to nonperforming loans increased to 90 basis points this quarter. The provision for the quarter was $24 million, impacted by several factors. Total criticized and classified commercial loans continued to decline this quarter, down by $181 million, with the largest decrease being in the substandard accruing bucket, which saw a drop of $169 million. Total nonperforming loans also declined for the quarter to $144 million from $151 million. Not surprisingly, given the macro environment and what’s happening with rates, unrealized losses on available-for-sales securities increased this quarter to about 4.5% of amortized costs, which I still think is overall, given the environment we're in, a pretty modest mark at 6.30. More detailed information about that is presented on slides 21 and 22 of the deck. The segments with the largest impact were private-label RMBS, private-label CMBS, and agencies. We believe that all these unrealized losses are attributable to increasing rates and widening spreads brought on by the Fed's actions and the market's expectations of their future actions. We believe these losses are temporary in nature. We haven't recognized any credit impairment losses and we don’t see these losses as indicative of any underlying credit concerns in the portfolio. You have some information on slide 22 in the deck about subordination levels that are very strong for the major categories of private-label securities. On the non-interest income side, we incurred a negative mark through the P&L of $9.3 million on some preferred stock investments, once again attributable to rising rates. The decline in other non-interest income compared to the prior year was largely due to lower BOLI revenue and a reduced gain on the sale of loans as we haven’t seen the kind of gains on the sale of EBL loans in this environment that we had in a different rate environment. Non-interest expense saw a decrease in compensation expense this quarter. Some of that was due to expected seasonal declines in payroll taxes and other benefits. Additionally, some share awards are liability classified and are marked based on the stock price at quarter-end, and since the stock price was lower at quarter end, that reduced our compensation expense this quarter. That aspect may be temporary, and we expect to see that expense rise again in future quarters. As Raj mentioned, we still feel good about our previous expense guidance, with no changes to that. With that, I'll turn it back over to Raj for any closing remarks.

No, I think I'm good. It's a solid quarter. I'm feeling optimistic about the next quarter too. I'll open it up for questions.

And our first question will come from Ben Gerlinger of Hovde Group. Your line is open.

Hey, good morning, everyone. Sorry if there's any background noise. There's a pretty big thunderstorm in Atlanta. I was curious if you guys could just break out a little bit of the loan growth expectations going forward. CRE had a pretty healthy rebound in the quarter, but as you think about growth from here, are there any areas that you're more targeted? I know construction was called out, but Bridge is kind of winding down, and I'm curious about the mix going forward?

Yes. Construction is still going to be not the main story. We are not a construction-heavy bank. I think core growth is going to come from C&I, commercial. I'm happy to see growth in CRE as well. We've just missed a couple of bucks, but CRE has been declining for many quarters, but I see growth in that area. I think some of the national businesses like Bridge and Franchise will likely not contribute to growth, as they have been declining for a while. While we had predicted that mortgage would decline, we're seeing healthy margins, especially in the jumbo business, where there have been wider spreads. We're trying to tackle where the market is, and allocate capital based on what we're seeing. That's the current outlook; if that changes, whether jumbo pricing or spreads become tighter, it will become harder to grow and allocate capital to those business lines. But right now, it looks like core C&I, even CRE, and to some extent, residential will continue to grow. The mortgage warehouse is an attractive business; we're growing commitments there, but utilization will stay low unless there’s a refi boom, which I don't anticipate. We're chasing better risk-adjusted returns, and those are the areas that seem poised for growth based on our pipeline.

I would also add that when you look at the CRE market, it's a divergent story depending on the asset class. The asset classes we favor are industrial, which we actually grew by 13% in the quarter; we like the industrial market a lot and still see room for growth. We also favor multifamily, and much of our construction activity is in that space. As Raj mentioned, a lot of the growth in the $37 million was in multifamily projects. Thus, we think multifamily and industrial will continue to be our preferred asset classes. In the mix of the CRE book, we've made improvements this quarter, as we focus on these favored asset classes. Additionally, we have been careful to pare down the retail and hotel segments. The loans that contributed to the slight decline were criticized and classified loans that we wanted to exit; so the growth in performing loans is encouraging.

Great, that's fair. That's great color. My second question comes from a more pessimistic view. Is there anything in your loan book that's more akin to private equity or sponsor or kind of cash flow lending that isn't directly named in those specialty lending verticals, or does it naturally reside within the C&I?

Yes, it's embedded within the C&I lines. I would say that overall, our level of sponsor finance-related activity is not significant in relation to the overall portfolio. I do think it could be better, and that’s why we hired an experienced sponsor finance relationship officer in the New York market, who is going to focus on better developing that business. But it generally flows through our geographic and industry-specific teams rather than residing in one dedicated sponsored finance unit.

Got you. Okay, that's helpful. I appreciate the color, and congrats on a solid margin expansion in the quarter.

Thank you.

One moment. Our next question comes from Will Jones with KBW. Your line is open.

Hey, great. Good morning, guys.

Good morning.

So just wanted to start on the deposit cost and deposit pricing. If you look at total deposit costs, they were up just modestly. I calculate somewhere around a low 20% beta. You guys have been very vocal about keeping beta lower this cycle. I’m just curious if you could talk to some of the factors behind your confidence in maintaining a lower beta through this cycle and how you are internally benchmarking where deposit betas could play out ultimately?

What I will say is, if there is uncertainty in our budgeting and planning, it primarily regards predicting betas. The reason is that often you predict betas by looking at historical information; how does your deposit base behave during past cycles? When we look back to four or five years ago when the Fed was raising rates, our deposit base and customer mix have changed quite dramatically, making historical predictions a less reliable method. We model this in every way possible but still find it to be the hardest thing to pin down. So, our models thus far have been more conservative than what we’re currently seeing. I'll also add that our modeling was done late last year when we were working on budgets, giving guidance for margin based on a different trajectory for Fed rate increases, which has proven much steeper than anticipated. Our beta has thus far emerged lower than expected, but this remains a dynamic equation that requires constant adjustment based on new information.

The deposit beta number is, indeed, around 20%. We expect that overall, our betas will be lower than they were in the last rate hiking cycle, but the level remains challenging to predict.

Got you. Very helpful color. You guys undoubtedly have one of the best deposit mix stories out there today. So thanks for the insight. Just switching gears, regarding the buyback. I know we've discussed that a lot over the past few quarters; you've been quite active in that area. Should we just assume a baseline for that at this point, or will buybacks continue at a significant magnitude as long as valuations remain attractive?

We have a board meeting coming up in August, and this will be one of the topics of discussion. Previously, when we took authorizations to the board, they were quick discussions; this time, I expect it to be a more interesting one. We're seeing better pipelines now than we were six months ago. If you have excess capital, do you want to deploy it in organic growth, through buybacks, or explore other options? Six months ago, we were not seeing the level of pipeline we've observed now. But we're also witnessing a very attractive stock price. So we have to balance these factors, especially in a precarious economic situation affecting stock prices, which also provides opportunities at lower prices. I anticipate this discussion will be far from a five-minute conversation, possibly extending to 30 minutes. But I don't want to preempt that; let that happen in August, and then we'll announce the board's decisions.

That makes sense. Outside of growth, do you see any other constraints in being as active on buybacks moving forward? How do you consider your capital levels?

There is indeed excess capital. However, if we can deploy it organically and how quickly, it also complicates matters since capital is dynamic. You create capital, but at the same time you’re growing; margins are improving, and identifying the best way to allocate resources is critical. Ideally, in a perfect scenario, I’d prefer to not execute any buybacks and simply focus on growth. The key decisions will involve how much we can safely grow, the state of the economy in the next six, nine, or twelve months, and other considerations that will be discussed. We’ll announce whatever the board decides.

Yes, great. Thank you for the color, and congrats on a solid quarter.

Thank you.

Thank you. And our next question comes from Stephen Scouten with Piper Sandler. Your line is open.

Hey, good morning, everyone. Thanks for taking my question. I would love some color on where you saw new loan yields in the quarter. Obviously, we can see what the average did; it seems that there's been nice movement higher. But I'm just curious about what you're seeing relative to rate hikes, and if you feel you’re getting compensated for credit risk today, and whether the spreads have remained consistent.

I'll let Leslie take the details, but generally speaking, I’ll say spreads are better; spreads are better in our loan business and securities portfolio. Given that the largest player in the market – the Fed – has announced they want to be a seller and not a buyer, it’s not surprising to see spreads improving compared to the last two years, with some businesses performing better than others.

Regarding new loan yields, there's a significant range, but on average, the new commercial loan yield for the quarter increased; at the end of the quarter, we came in around 4.30%.

Okay, and how does that compare to what you observed last quarter? If you remember any ballpark figure?

I don't have the exact number in front of me, but it's up considerably, and it's a bit tricky to compare because we had less production – thus a smaller loan set – last quarter. However, it’s definitely up more than 100 basis points over what we saw on average last quarter, which is significant. More importantly, average yields are now higher than what we had in the back book, marking an important inflection point.

That's helpful. Lastly, in terms of deposit costs, you mentioned wanting to hold the line on non-interest bearing deposits that have performed well the past couple of years. However, I'm wondering what you're seeing competitively, especially regarding money markets? Your loan-to-deposit ratio is at 84%, traditionally lower than the industry average. Can you discuss how you think competitive pressures may impact money market deposits, particularly?

There’s quite a big range depending on the business in question. In our branches, we aren't experiencing as much competition just yet. We don't compete aggressively online, but we do monitor it and see intense competition there. For our commercial side, the competition remains modest for small business and core middle market, whereas larger corporate clients and bigger depositors have seen competitive pressures rise quickly. If we’re examining our book, there’s a significant spread in where we've had to move rates aggressively for certain sectors, while other segments haven't budged. It varies widely; some segments are at 10 basis points while others reflect the effective Fed funds rate. There isn't a straightforward answer; it’s a broad range based on customer type and what is being demanded in the market.

From a forward-looking perspective, our willingness to raise deposit rates will be contingent on the asset side spreads that we're experiencing. If we see robust and wide spreads on new business, it allows for some flexibility with funding costs compared to a situation where those spreads aren't favorable. So, that will factor into our future strategy regarding the cost of funding.

Sounds like a plan. I think last quarter you mentioned a positive 2.6% asset sensitivity in a hypothetical 100-basis-point rate hike scenario. Since you noted you're ahead of your deposit beta projection, has there been any significant change to that?

You will likely see a bit more asset sensitivity when we release this quarter's numbers, but overall, philosophically, we maintain a relatively neutral position. The volatility we've observed over the past few years, along with predictions of potential future volatility around rates, reinforces my belief that our board's directive to manage to a neutral standing is prudent. Therefore, we won't likely take a big bet on rates all of a sudden; we've never operated that way and don't intend to now.

Understood. Lastly, regarding stock expenses, you mentioned them being temporary, and that you've onboarded new hires. Can you remind us what the overall expense guidance was? What would be a good starting point for Q3?

We had projected a mid to high single-digit increase for the full year compared to last year after adjusting for some one-time factors that affected last year's fourth quarter. We still feel that is a good guidance point moving forward.

Got it. So, probably just a couple million quarter-over-quarter related to that temporary effect? Nothing material?

Yes, that's likely in the right ballpark.

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

We must be competing with other earnings calls. But that's okay. I’ll take it as good news. Thank you very much, everyone, for joining us. As I said, we’re pleased with the quarter and are looking forward to the next one, with optimism. Thank you for your time, and we'll talk to you next quarter.

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