Earnings Call Transcript - BKU Q3 2021

Operator, Operator

Ladies and gentlemen thank you for standing by and welcome to the BankUnited Third Quarter Earnings Conference Call. 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 of BankUnited. Please go ahead.

Susan Greenfield, Corporate Secretary

Thank you, Lis. Good morning, and thank you for joining us today on our third 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 31, 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.

Raj Singh, CEO

Thank you, Susan. Welcome, everyone. Thank you for joining us for our earnings call. Let me make a few quick remarks about what we are seeing in our markets before we get into our results. Three months ago, when we met on this call, Delta was beginning to surge; Florida seemed to be caught up in it more than probably any other state. There was a lot of concern as to whether that would affect the economy and to what extent. I am happy to report three months into it, now, Delta seems fairly in the rearview mirror. I checked the numbers just a few minutes before this call, and I think they have come down to even lower than they were three months back. So, we're happy about that. What we are most happy about is also that it did not actually have the same kind of impact that previous surges have had on the economy. I think the economy is learning to live with these surges as and when they happen. Hopefully, there won't be any more, but at least over the last three months, we did not see a significant impact to the local economy here or in other parts of the country where we do business. Overall, the economy here in Florida is doing well. There are obviously widespread labor shortages and supply chain disruptions that everyone has talked about. We are seeing that; our customers are feeling it, and indirectly we're feeling that as well. But I think it has been pretty good to see that these issues concern us but could have been so much worse. In regards to the quarter, we posted net income of $87 million or $0.94 a share. This compares to $104 million we posted last quarter, which was $1.11 per share. The annualized returns so far for the nine months underscore our return equity at 12.4% and return on assets of 1.09%. Cost of deposits, as we've been telling you, continues to come down. We dropped 20 basis points this quarter, down from 25 last quarter. Loans, total loans excluding P2P runoff grew by $74 million, and I would say nothing but good news on the credit front. I know these days credit is not the top of mind for many, but it should always be on everyone's mind. So, I'm happy to report criticized classified assets declined by $240 million. Our NPA ratio improved to 1.21% this quarter down from 1.28% last quarter. Overall, I believe we are in a pretty strong position, and I will turn it over to Tom who will get a little deeper into the numbers before Leslie gets into the P&L.

Tom Cornish, CFO

Thank you, Raj. I wanted to spend a little time first on deposits, providing some detail and perspective on our achievements in the quarter. Average non-interest bearing deposits grew by $749 million for the quarter and $2.7 billion compared to the third quarter of 2020. Period end non-interest bearing DDA grew by $324 million while total deposits shrank by $493 million. The focus for us is on new client acquisition and ensuring the quality of our deposit portfolio. Notably, we work hard on opening new operating accounts to enhance our overall deposit margin. However, money market accounts declined by $1.1 billion this quarter as we continue to execute on a strategy of focusing on the quality of the base. When we move to the loan side, as Raj mentioned, we saw the total portfolio grow by $74 million in the third quarter. Residential loans continued to be strong, reflecting the ongoing strength of the housing market and rate environment. However, we did see a decline in the multifamily segment, which I believe is stabilizing and could present opportunities moving forward. Overall, I see a reasonable return of pipeline especially in the commercial area as we head into the fourth quarter, and I feel optimistic heading into 2022 as clients begin to invest more.

Raj Singh, CEO

Thank you, Tom. I want to highlight our focus on loan growth as we aim for a balanced approach. We're seeing payoffs, especially in certain sectors, but we are strategically managing our risk appetite. While we will remain cautious about certain impacted areas, other segments like small business, corporate, and some aspects of commercial real estate are performing well. We will remain opportunistic on our strategy for the future. I will turn it over to Leslie for more detail on the numbers.

Leslie Lunak, CFO

Thank you, Raj. Let's delve into the numbers. The NIM declined this quarter to 2.33% from 2.37%. The overall cost of deposits saw a reduction, and we expect some stability in NIM going forward. The total provision for credit losses was a recovery of $11.8 million, indicating a favorable credit environment as evidenced by the declines in criticized and classified loans experienced this quarter. Additionally, we are pleased with the growth seen in our residential mortgage portfolio, significantly impacting our overall growth in loans. Overall, we're focused on ensuring the long-term health of our balance sheet and maintaining a strong capital position. We will continue to manage our credit losses and investment strategies effectively.

Raj Singh, CEO

Leslie, do you have any closing remarks?

Operator, Operator

And our first question is from Ben Gerlinger with Hovde Group. Your line is open.

Ben Gerlinger, Analyst

Hey, good morning, everyone.

Raj Singh, CEO

Good morning.

Ben Gerlinger, Analyst

I was wondering if we could start on loan growth in general. It was great color and commentary from opening remarks. I was curious if you guys could take a minute to kind of just walk through the competitive aspects of the markets that you're working in. It seems like some competitors are doing a little bit stronger loan growth, but backing to the map they're probably doing at a lower rate. So, with the payoffs you are seeing in the line utilization somewhat plateauing recently, are there areas of low-hanging fruit that we should expect to see in terms of growth and the dynamics you're working through?

Raj Singh, CEO

In terms of production as Tom said, if you just look at growth production levels, we were pretty happy with where the quarter came out. The only place where we're not active and very deliberately pulled back are areas that are still impacted by the pandemic. So, everything else, small business, corporate, commercial business, other aspects of CRE, we are seeing pretty decent production. But enormous amounts of payoffs continue to hit us. Where we're seeing significant competition from a rate and structure, I would say it’s LIFOs that are doing very long-dated IOs, going out 10 to 15 years that we refuse to compete in that space.

Tom Cornish, CFO

To further clarify, large payoffs for us mostly come from clients selling their businesses, particularly within the C&I book. M&A activity is incredibly strong right now.

Ben Gerlinger, Analyst

Got it. Okay, that's helpful color. I appreciate that. And I was just thinking kind of the bigger picture now, you’d be kind of a top-tier steward of capital. Given where the stock is today, why not do something more aggressive in terms of share repurchase?

Raj Singh, CEO

I mean, I don't have the exact numbers, but give or take $130 million in stock buybacks within less than a quarter. So, I'd say we were fairly aggressive. Our buyback philosophy has been to remain opportunistic.

Leslie Lunak, CFO

We are currently in the midst of our capital planning process for next year right now, and I’m going to defer providing specific guidance until our next call.

Dave Rochester, Analyst

Good morning, guys. Back on the buyback topic, I was curious how much do you think you've got in excess, because you'll be growing loans hopefully faster next year? Just curious how you think about that?

Leslie Lunak, CFO

We do appreciate that there's a lot of capital and there is room to grow.

Tom Cornish, CFO

We are good at where we are in the New York multifamily portfolio right now. The cohort of opportunities is stabilizing and could present growth in the coming quarters.

Ben Gerlinger, Analyst

Okay, great. I appreciate I'll step back in the queue.

Operator, Operator

Our next question is from Dave Rochester with Compass Point. Your line is open.

Dave Rochester, Analyst

Hey, good morning, guys. Back on the buyback topic, you mentioned you'll keep doing more beyond this buyback. As you're looking at your excess capital position, how much do you think you've got in excess?

Leslie Lunak, CFO

I think we will continue to buy back stock if the capital position remains strong.

Raj Singh, CEO

If the stock stays at the level it has been in recent months, we will continue to consider buybacks.

Dave Rochester, Analyst

It would seem like you would continue that growth not necessarily aggressively but being active in the buyback.

Tom Cornish, CFO

When we look at production, we have seen reasonable return of pipeline, especially in the commercial area which we believe is improving.

Leslie Lunak, CFO

Let me clarify something. We're not seeing a trend in the other income line; it's more of an episodic occurrences which wouldn't indicate the trend.

Raj Singh, CEO

I want to highlight our focus on technology. It drives our business now and we're continually making investments to solve customer problems.

Operator, Operator

I'm showing no further questions. At this time, I would now like to turn the call back over to Mr. Raj for any closing remarks.

Raj Singh, CEO

Thank you very much for joining us. And we'll talk to you. Thank you. Stay safe, everyone.

Leslie Lunak, CFO

Bye everyone

Operator, Operator

Ladies and gentlemen that does conclude the conference for today. Thank you for your participation. You may now disconnect.