BankUnited, Inc. Q1 FY2023 Earnings Call

Thank you, Sherry. Good morning, and thank you for joining us today on our first quarter 2023 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 reflects 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. These factors should not be construed as exhaustive. Information on these factors can be found in the company's Annual Report on Form 10-K for the year ended December 31, 2022, 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. Welcome everyone. Thank you for joining us today. It's been an eventful quarter. We have a lot of information to share with you, so this call may be a little longer than usual. Let me start by making a simple statement: our business is stable and growing, our liquidity position is strong, and our capital base is robust. These – if all you take away from our call is just that, that's sort of the most important thing in all the remarks that we will make. Let me elaborate a little bit on each one of those three things. The week of March 13th was certainly disruptive. It cost us about $1.8 billion in deposit balances. The deposit flows returned to normal the week after that. In the last two weeks of the quarter, we actually saw a build of about $245 million in deposits, which is very normal for us. We always see a build in deposits late in the quarter, usually late in the month, but certainly late in the quarter. Our liquidity position, 62% of our deposits are either insured, FDIC insured or are collateralized. We currently have $12.3 billion in same-day availability, which equates to a 128% ratio of the uninsured deposits to collateral and uncollateralized deposits. Our capital position, as you already know, is strong. Our CET1 is 10.8%, and at the bank level, it's 12.5%. We have suspended our buyback given the volatility that we're seeing in the markets. We will revisit that decision later in the year. And also just the CET1 ratio of 10.8%, if we were to put our AOCI mark through it, it would still solve to a 9.4%. And of course, with the suspension of buyback now, the CET1 ratio will start to accrete every month, every quarter. So based on just those things, I'll reiterate again, business is stable and growing. Our liquidity position is strong, and capital base is robust. Now, let me talk a little bit about the quarter, especially about loans and deposits. From a loan perspective, the first quarter is our slow quarter. This quarter it was mostly flat. Our deposit side can be divided into two halves. From January 1st all the way to the events of March 10th and 11th, it was looking fairly normal on both the lending and deposit sides. Then the weekend events happened on March 10th, 11th, and 12th. We saw outflows of about $1.8 billion in the first few days, most of it on Monday, some of it on Tuesday and Wednesday. But by the end of that week, things basically returned to normal. We did a deep dive into exactly where that $1.8 billion came from, and it really came from 10 relationships. Two of those ten relationships surprised us. Eight were institutional customers who decided that the regional bank sector was too risky and wanted to pull their money out. The other two were very core businesses. We didn’t engage very strongly to bring that money back because it showed us how non-strategic that money was. On the lending side, we are careful in what kinds of loans we do. The resi portfolio is strong this quarter, but you should expect it to keep shrinking over the course of the rest of the year. C&I will grow given the pipeline we’re seeing. Overall, last year we did buy back $55 million of stock until it was paused. Our buyback will remain suspended until we see more stability in the economy and in the liquidity situation that the banking industry finds itself in.

Great, thanks, Raj. So Raj covered the deposit outflows a little bit. I thought I would talk a little bit more about what the deposit pipeline looks like and sort of what we're seeing in new client relationships. Market share will be the name of the game as we look at growth from this point on. If we went back into Q1, we had well over 500 new commercial relationships between the commercial teams and small business teams. That consistency has carried us through over a long number of quarters now. We feel really good about what the deposit pipeline looks like over the near term, this quarter, next quarter, and the rest of the year. We've got a number of specialized teams. We continue to invest in TM products, payment capabilities, specialized products within verticals such as HOA and our title service business, which are two examples. We've invested, as you know, significantly in our digital capability for the small business side, and small business relationships are coming in at around 400 every quarter. We've recently rolled out a new consumer checking product that we believe will be attractive. While we don't have a lot of overlap with Silicon Valley, we do have some overlap with banks in New York that have been in the news for various challenges, and it's presented us with a strong number of new account client opportunities in the New York market. We've continued to onboard new relationship managers in all geographies and verticals. Last week, we opened our office in Dallas and hired a CRE head in Dallas. That's our first hire in the market, and we already see our pipeline starting to build there. I think over the next week or so, you should expect to see us make a significant team acquisition in the New York market that we will finalize in the next couple of days. If you take a look at Slide 8 of the deck, it shows some breakouts of deposit verticals. Our largest is in the title solutions business with total deposits of around $2 billion, over 85% of which are in operating accounts, with over 8,000 accounts in this space.

Thanks, Tom. So in summary, net income for the quarter was $52.9 million or $0.70 per share. The NIM declined to 2.62 for the quarter compared to 2.81 last quarter, up from 2.50 for Q1 of 2022. We missed guidance on the NIM that we gave you in January. While earning asset yields continued to increase as expected, securities from $433 million to $495 million and loans from $472 million to $510 million; we underestimated the amount of mix shift that occurred between non-interest bearing accounts and interest-bearing deposits. Non-interest bearing deposits were down about $780 million, and average cash balances for the quarter were up almost $300 million, all of that happening at the end of March, offsetting with a $1.1 billion increase in wholesale and other high-cost funding at current market rates. The average cost of deposits went up from 1.42% to 2.05%, and the cost of FHLB advances went from 3.44% to 4.27%. Any guidance we give you about the NIM is fraught with peril as it's a difficult thing to predict right now. But I will give you one scenario: if we're able to keep deposits and the funding mix flat over the remainder of the year, and see the strategic shift in loans that Raj described, I'd expect the NIM for the year to be in the 250s.

I'm going to pass it over to Tom, who will go through a little more detail on the numbers before Leslie will finish, and then we'll take questions.

Thank you. Our first question will come from Jared Shaw with Wells Fargo. Your line is open.

Hey, good morning. Maybe just starting on credit, Leslie, you mentioned that you were paid off on a loan that was in criticized and classified. Is that also the loan that increased nonperformers, the C&I loan? Is that the $20 million increase in non-performance?

No, Jared, it's not. I would say nonperformers are up by a negligible amount and no trends there, nothing unusual. We're seeing those as just normal puts and takes.

Okay. So that $20 million increase in the C&I side is not tied to one or two loans, it's more diversified?

Yes. I think it's not that long. It's just normal puts and takes. There's nothing indicative of anything systemic or any kind of trend.

Okay. I really appreciate the color on the commercial real estate side, especially the office and looking at the trends in the New York office space. You have really good debt service coverage ratios and loan to values. But what's your thoughts in terms of what those landlords and property owners are going to do when those loans come due? Do you think that they have an appetite to add equity and refinance or do you think you're going to see more property sales at that point when those loans come due?

Yes. What I would say on that, Jared, is that when we look at the New York market, the quality of the sponsors that we have in the New York portfolio, the deep pockets they have, and the fact that these are predominantly generational assets that they have owned for a long period of time, I think that they will maintain these assets over that period and will stand behind the properties to inject equity if that's what's needed at the time. Right now, lease rollover and maturities are relatively light in that book, so we'll see what plays out over the next couple of years. But I would say when we specifically look at the New York Manhattan office portfolio, the quality and depth and capability of the sponsors gives us great comfort.

Okay. That's good color. And then on the opportunity, you said CRE relatively flat. But when you look at New York City, especially with Signature now gone, do you think there's going to be additional opportunity for commercial real estate there, and maybe even in rent-stabilized multifamily with some of the law changes that we're seeing? Or is that still an area you're not that interested in expanding?

I'll take that one. We consider all opportunities that come to us, but we're not particularly enthusiastic about that one. With the economy slowing down and many uncertainties, we aren't too optimistic about expanding in commercial real estate. We've worked hard to reduce our commercial real estate portfolio by $2 billion over the past few years and have effectively lowered its risk. I'm not saying we will never pursue it, but that’s not where my enthusiasm lies given the current situation with banks exiting the market. Commercial real estate is often transactional; it can bring in deposits, but not significantly. That's why we prefer to focus more on the commercial and industrial side rather than commercial real estate. However, that doesn’t mean we’re completely avoiding commercial real estate; we are still involved, but I don't expect significant growth in that area. You might see some replacements and perhaps a little growth, but more growth is likely to be in commercial and industrial.

Yes. I would also add to Raj's comment and say that our overall perspective on CRE is very disciplined from an asset allocation perspective. While we're not seeing any shortages of phone calls in the New York market, it isn't a situation where we would deviate from our asset allocation strategy. And when we look at CRE across the footprint, we're sitting in Florida with a very strong demographic and economic scenario. We have now a CRE office in the Atlanta market, we have one in Dallas, demographics that are growing very strongly.

That's great, thanks. And then just finally for me, when you look at the $1.8 billion of deposits that left, were there any lending relationships tied to that or specifically any lending relationships that require deposits? And if so, what's your expectation with those?

Yes. Of the 10, the two that I talk about separately, those are very strategic. We have the full relationship. We do everything for them. We have lending, cash management, treasury, the entire back-office is run out of BankUnited. So those are very core. The other eight, a couple of them where we do have small pieces of the lending side, we actually told them that we will not be renewing because even the lending side was more transactional in nature. I mean we’re going to be nervous about the deposit relationship, we're going to be nervous about the credit relationship.

And just to reiterate, those deposits did not leave the bank. They just reduced their exposure among more banks, and those accounts are still here.

Thank you. One moment for our next question. And that will come from the line of Brady Gailey with KBW. Your line is open.

Thanks, good morning, guys. When I look at loan growth, commercial real estate is going to be flat, C&I growth is maybe offset with resi shrinkage, should we think about loans being flat going forward? So maybe loan and asset balances are kind of flat from here on out?

Yes, I would think so. Yes, for this year.

Yes. But you'll see an improved margin because of the shift from resi into C&I.

Okay. And then BankUnited has repurchased a lot of stock over the last several years. I realize the uncertainty and the increased risk in the banking system right now, so I get the pause there. But at the same time, your stock at 65% of tangible book value, when do you consider turning that buyback back on?

I think it will be a topic of discussion at every Board meeting over the course of the rest of the year. Starting in May, we will have a discussion. I don't think we're going to do anything in May. But at the August board meeting and the November Board meeting, this will be discussed. It is the prudent thing to do right now, given all the uncertainty around liquidity, around the economy, and around even regulation for that matter.

Alright. Lastly, if you examine profitability metrics such as return on assets and return on tangible common equity, they are still quite low. I understand that there isn't much to be done about the net interest margin currently. However, is there a chance to make adjustments on the expense side to see some improvements? I know there was a cost reduction plan implemented before. Is that a strategy being considered to enhance BankUnited's profitability to match industry peers?

Brady, the lever that will move profitability more than any other is going to be revenue, not expenses. Margin is depressed given the makeup of the balance sheet right now. That mix has to actually change to a higher performing mix. That is what will move the needle. I'm hesitant to say we will stop investing in the business because if I think back to the mistakes we've made over the past couple of years, one was during the pandemic, we pulled back and did not make investments in producers and revenue generators.

Okay, great, thanks, guys.

Thank you. One moment for our next question. Our next question will come from the line of Stephen Scouten with Piper Sandler. Your line is open.

Hey, thanks, guys. Appreciate it, good morning. I guess one question I had just on the funding side would be capacity for broker deposits. Can you give me a feel for how much – and maybe that's in the slide deck, I apologize, but what the level of capacity you guys would have from here to add those as needed?

Stephen, there is still capacity to add. I don't think we're going to need to do that in the short-term. I think we've got enough other types of deposits in the pipeline right now. But we could add another $500 million to $1 billion, but I don't think that will be necessary.

Okay, great. And then can you give some color about the marginal cost of deposits today, where you're seeing new deposits price and what spreads that's leading to what you're able to book new loans of that as well?

Yes, it's a wide spectrum. For us, retail is a little easier to answer. Right now, we have money markets priced at 3.50%. And at 3.50%, it's not getting much traction. We have 12-month CDs priced at mid-4s, about 4.50%. On the commercial side, it is a much wider spectrum, but we're currently engaged with a complex treasury relationship that will be priced in the 2s. Other money could be at 4%. It's a much wider range on the commercial side based on what you're selling and what the complete package looks like. On the consumer side, if you want to grow, those are the kind of numbers we're seeing, especially given Florida's market.

Got it. And new loan yields and what sort of spreads you might be seeing, I guess, can you deliver like a 3% spread on new loan production?

Loan production is now getting into the SOFR plus 300 range.

Okay, great. And then maybe just last thing for me. It sounds like the team in New York that you're looking to add is non-CRE focused, presuming C&I focused. But I guess I'm curious if you'd have interest in potential signature loan sales as they become available later this year?

Yes. We are familiar with that book, and I don't think we will have much interest.

The other thing I would say is we're really leaning away from credit-only deals. We're really looking for relationship-based business where we're getting a full relationship with the client and really deemphasizing credit-only business.

Thank you. One moment for our next question. And that will come from the line of David Bishop with Hovde Group. Your line is open.

Yeah, good morning. Leslie, you mentioned the Federal Home Loan Bank side, possibly structuring there. Just curious to get some color on what's being contemplated there, are you going to maybe term that out?

I don't have a lot of details yet because we're still analyzing and deciding what makes the most sense to do, but probably swapping some of it out. It makes more sense to swap it out and determine to get better pricing because of their term premium. We're analyzing all of that right now, and I think we can bring the cost of that portfolio down and am fairly optimistic about us being able to pay some of that down in the near term as well.

Got it. And then, Raj, in terms of the de-emphasis on the resi mortgage side there, is that just reducing as a percent of capital? It’s gotten too big from that perspective.

Yes. I think it's just too large a portfolio. I mean when you look at our mix of loans, I just made a comment about we took CRE down by $2 billion since the pandemic. When you take something down, something else grows. Now in 2023, I look at the mix of loans and say we got too heavy in resi and securities, and we need to remix this a little bit, which will help returns. The resi portfolio is high credit quality, and while it's not a 30-year, 10-year IO type portfolio, it's carefully constructed. It will run off and be sensitive to interest rates.

It's more a return question than an interest rate risk question. The interest rate risk is nicely balanced by the short duration bond portfolio.

Yes. Got it. Appreciate that color. One final question, Leslie, the preferred securities that you sold that drove the loss, was that the entire exposure to those entities?

Closer to that issuer, it's not the entire preferred securities portfolio that was sold.

The preferred securities portfolio, the mark in that goes through the P&L every quarter.

Okay, thank you. Our next question will come from the line of Brody Preston with UBS. Your line is open.

Hey, good morning everyone. Leslie, I just wanted to circle back on that one multifamily loan that went special mention but has obviously paid off. Was that a New York City-based multifamily property?

No, it was actually in Florida.

It wasn't an individual loan. It was a loan in our institutional real estate group that was a fund investing in multi-families. It wasn't an individual property and it paid off.

Got it, okay. I appreciated the stress test slide that you all included. I wanted to ask just a couple of questions about it. How does the probability of default and loss given default in these scenarios shake out versus what you consider in your baseline modeling?

Both are higher. I don't have the exact numbers in front of me, both the probability of default and loss given default are higher in this scenario than in the baseline.

Understood. I was particularly curious about the increase in the hotel losses.

In a recessionary scenario, the underlying assumption is that people just stop traveling and stop staying in hotels. You see the big spike in the hotel losses, influenced by what happened in the pandemic.

Got it, okay. And then just on the expenses, just to clarify if the expense guidance that you gave last quarter for the full year is still intact.

Yes, I think we'll probably end up more towards the higher end of that guidance, but yes.

Could you remind me about the floating rate loan percentage you have and the interest-bearing beta you are assuming in your sensitivity analysis?

Yes. I will throw in the answer to the question about the preferred securities. That's $69 million left in that portfolio segment. Those are not in the available-for-sale portfolio; they get mark-to-market every quarter. But it's $69 million at March 31st, and that sits at the holding company. Betas, the total deposit beta to date this cycle through the end of the quarter is about 43%. That's all-in. That's about 62% for interest-bearing deposits, excluding CE. Including CDs, it's 45% all-in and 61 for the cycle.

Got it. Just on the bigger deposit outflows that you called out, the 10 relationships, how much of that $1.9 billion was non-interest bearing?

$1.9 billion on the top 10 customers who left, how much was interest-bearing, how much non-interest bearing? I do not have that in front of me.

Okay. And then the last one, Raj, for you on the ROA improvement. I heard you earlier about remixing. It's going to take a couple of years, just given the economic outlook and the securities portfolio being large.

Yes, it's the resi portfolio that will drive it more than the securities portfolio. The securities portfolio, while it's large, is 68% or 70% floating rate. It's the resi portfolio, which the runoff of that portfolio at current CPR rates is slow. The speed with which we can remix will depend on that. The goal is still 1% ROA and low double digits ROE, and this model should get there.

Got it, thank you very much for taking my questions. I appreciate it.

Thank you. One moment for our next question. And that will come from the line of Steven Alexopoulos with J.P. Morgan. Your line is open.

Hey, good morning everyone.

Good morning, Mr. Alexopoulos.

I wanted to start, going back to the $1.8 billion of outflows. Can you just give us more color on where that money moved to?

Almost all of it went to your bank, Steven.

Well, let me say this, why couldn’t you make greater use of the insured deposit network because I would think that's lower cost than FHLB?

They were not interested. Their Boards made a major decision over the weekend to move all of their money out of midsized banks, not just out of BankUnited. We had long conversations with these folks, and their Boards decreed that all money would be moved out of midsized banks. I believe that about 95% of it is now on your balance sheet.

Because generally when we talk to the management team, they were supportive and open to the idea in the future, but they were not in a position to negotiate with their own Boards over this.

And what's your latest thought on where the mix of non-interest bearing deposits bottoms?

Very hard to say. I can confidently say it's not going back to pre-pandemic levels.

Yes, okay. And then – Raj, you've been working to improve the deposit quality for a couple of years now. I'm curious what lessons do you learn from what just unfolded, not just for you, but for the whole industry and how does this change the go-forward strategy for the company?

Yes. We learned some things we already knew, but we now know even more. In that category, smaller is beautiful. No home runs, only singles and doubles. We have to worry about the reputation risk, but also the company you keep. We have a pipeline of business. Our clients are still running their businesses. There was a difference between what 2009 felt like and what this feels like. This was very, very sudden, and it went back to normal with clients not with CNBC, but it went back to normal a week later. We're still in a little shell shocked situation but the customers are business as usual. The largest part of what matters more to middle market customers and small businesses is knowing that we have the relationship; I can always call someone who has authority.

Thanks for taking all my questions. Appreciate the color.

Thank you. And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Raj Singh for any closing remarks.

I think we've taken enough of your time. We've had a rather long call, but thank you very much for joining us, and we'll talk to you again in 90 days. Bye.

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