BankUnited, Inc. (NYSE:BKU) Q4 2022 Earnings Call Transcript

BankUnited, Inc. (NYSE:BKU) Q4 2022 Earnings Call Transcript January 19, 2023

Operator: Good day and thank you for standing by. Welcome to the BankUnited Fourth Quarter and Fiscal Year 2022 Earnings Call. At this time, all participants are in a 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 over to your speaker today, Susan Greenfield, Corporate Secretary. Please, go ahead.

Susan Greenfield: Thank you, Michelle. Good morning, and thank you for joining us today on our fourth quarter and fiscal year 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 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, 2021, 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: Thank you, Susan. Welcome, everyone. Thank you for joining us. So we announced earnings this morning. EPS for the quarter came in at $0.82; for the fiscal year, $3.54. Let me get quickly into the components, the key components that you will find in the release. Loans. Loan growth came in at $619 million. If you look at our meet and pay businesses, commercial and CRE, it actually grew $722 million. So very happy about — what the lending teams were able to get done this quarter. Deposits, which are under a lot of pressure across the system, we actually grew deposits a little bit, $160 million, though NIDDA did decline given the rate environment and how Fed funds is. So NIDDA decline was $756 million. DDA now stands at about 29% of our total deposits.

When we started this DDA growth journey in five, six years ago, I think we were at 14%. Just before the pandemic, we were at about 18% DDA. Today, we’re at 29%. So feel pretty good about it. Despite the reduction in DDA that we saw this year, we’re still in a pretty decent place. Margin expanded again, though a little less than in previous quarters, as we have highlighted to you. Margin came in at 2.81%. It was up from 2.76% in the prior quarter. So for the year, I think margin grew by 30 basis points, which is right in line with what we have guided to you at this call last year. Provision, before I talk about provision, let me talk a little bit about credit quality. Criticized, classified assets continue to come down as they have over the last many, many quarters.

Our NPLs are actually now at 42 basis points. They were 64 last quarter, and this includes a guaranteed portion of SBA loans. If you back that out, NPLs are now down to 26 basis points. Just before this call, I asked Leslie to check for me what the NPLs were before the pandemic hit. And NPLs today in dollars are at $105 million. And before the pandemic hit, we were at $205 million. So NPLs today are half of what they were. And so from a credit quality perspective in the portfolio, the last two years, we’ve been sort of consciously and subconsciously been getting ready for whatever slowdown is coming, and we feel pretty good about where we are whatever comes our way. Having said that, we are more pessimistic about — or more cautious about the environment than we were three months ago.

So we did tweak our assumptions and increased our reserve. We took our reserve up from 54 basis points to 59 basis points. We, of course, had growth in the portfolio. All of that added up to a provision of just under $40 million. Also, the buyback continued as we have promised last time. We had bought back, I think, in the fourth quarter, $65 million. We’d already bought $10 million in the — from this authorization in the previous quarter that leads to $75 million in this authorization, which we’re continuing to — we’ll continue to execute as we see fit. Quickly, let me talk about the environment, and then we’ll talk about guidance for next year. The environment, 2023, this is a year of the slowdown and possibly even a mild recession. That seems to be the consensus out there.

The curve is inverted. As everyone can see, the Fed wants to take short-term rates up closer to 5%, and the 10-year certainly wants to go closer to 3%. So it’s an inverted yield curve and it is expected to stay inverted all through this year, probably into next year as well. Last year, the Fed slammed on the brakes. This year, they’re not slamming on the brakes. It looks like they still have some pressure on the brakes, and they’ll probably take the foot off the pedal sometime this year, but it’s unlikely at least based on what the Fed is saying that they will step on the gas pedal. The market disagrees and only time will tell eventually how things play out. We build all of our internal models and projections and everything based on whatever the future curve is getting us.

Labor costs, while they were very high last year, I would say they are still higher than usual, but they are moderating somewhat, based on some weakness that we’re seeing in certain sectors. So that is good news that labor costs start seems to be getting back to normal, but it’s not back normal yet. On the other side, it is good news. Margins are better than we’ve seen. Lending margins, loan pricing is very rational. We’re getting paid for taking credit risk, pretty much across the board from the safest to — across the spectrum, any kind of asset you want to participate in, margins are 50, 70, 80, 90 basis points better than they were just nine months ago. And most importantly, Fed is succeeding in its mission of controlling inflation. That was very important.

Three or six months ago, this looked like a pretty crazy place that the economy was in, but the Fed is finally having success. And eventually, that will also have an impact on this inverted yield curves are not good for bank margins. So, as the Fed finishes this tightening and get to the other side, it will be a better rate environment for banks. But right now, it’s an inverted yield curve which is tough. Last year, we gave you guidance around loans, deposits, margins, and so on. We said loans would grow mid to high single-digits. It grew 6% in total, 13% for C& I and CRE, our main mega site bread and butter categories. Deposits, we said mid-single-digits, but starting in January of last year, nobody foresaw what the Fed was about to do. I don’t think even the Fed foresaw what they eventually did.

So, we missed on that. Margin, we said would expand, it did, at 30 basis points, came in exactly as we expected. Expenses, we said would grow mid to high single-digits and it did, 7.5% growth in expenses. And the end result was — we also said we would buy back stock, and we did, a little over $400 million worth of stock. NII grew 15% based on — actually, one of the metrics I asked this morning — I also looked at 2019 as sort of a year to compare things to because 2021 were pretty messy years with large provisions and reversing provision and so on. And really clean year is 2019, and I often ask about, just like I said about NPL total, our NPLs at the end of 2019 versus today where they are. I asked about margin also and our margin has — despite the difficult rate environment, our margin is significantly better than it was in 2019, which is sort of an end result of all the hard work that has gone into improving the franchise.

Cost of funds, while it is elevated at 142 base cost of deposits, 142 basis points, it is 142 basis points in an environment of north of 4%. Fed funds rates would be get to 5%. So, it is — a lot of progress has made on the balance sheet, whether you look at credit metrics or profitability metrics. Yes, there is a lazy part of the balance sheet still sitting there, very large securities portfolio, large resi portfolio, which will sort of wind its way down over time. But overall, I think the balance sheet is in a much better place than it was before the pandemic. This year, given everything I’ve said about the environment, I think we’re looking at loans growing at mid-single-digits, deposits doing the same. Margins still expanding, though not as much as it did last year.

And expenses, again, very similar to last year — expense growth. Buyback will continue. We will get this $75 million done over the course of next few weeks. And all likeliness, the Board will authorize another $150 million after that. A quick reminder. It’s been now nine months since we launched our Atlanta presence. I’m extremely happy with how that has panned out. We did open a branch in Dallas, but we did not truly acquire a team on the commercial banking side. We are in the market for that now. So Dallas will be the project for this year in terms of having full capability in Dallas, not just a branch. Atlanta is off the races. I’m very happy with that. And I think going forward, we will look to opportunities like Dallas, like Atlanta and continue to grow this, and this will become part of our ongoing strategy.

So with that, I don’t want to take away all the talking points here. I’ll leave some for Tom. Tom, I’ll pass it over to you, and then you can pass it to Leslie.

Tom Cornish: Great. Thanks, Raj. So as Raj mentioned, total loans grew by $619 million for the quarter, C&I grew by $599 million and CRE grew by $123 million for the quarter. And overall, as we to continue to meeting the cadence analogy, the $722 million growth in those two lines of business was extremely encouraging for us. We felt great about it. And I think if we break it down a little bit and look at industry components and asset classes, it was really broad. You can see in the supplemental data that we generally provide, in the C&I side, we grew 11 different segments during the quarter. That really led to $600 million essentially of loan growth in the quarter. It continues on a strong C&I growth number for the entire year.

So separately kind of our middle market and corporate banking business, it grew by 25% for the year. So it was just an outstanding year. I think that’s reflective of both our own efforts, and it’s also reflective of the fact that we’re in great markets. Florida has performed extremely well. All of the major cities in Florida have done very well. We’re blessed to be in great markets. As Raj said, we really couldn’t be more delighted than we are with what we’ve been able to accomplish in Atlanta in a very short period of time, multi-hundreds of millions of dollars of commitments in that market, excellent relationships. And we are very enthusiastic about expanding into Dallas. We see Dallas is a very parallel market to Atlanta in terms of size of the MSA, in terms of depth of the economy and breadth across the number of industry segments that fit the kind of risk profile that we’re looking for in terms of diversification.

And so we’re excited about that. Rest of Florida continues to do well. We saw good growth in the commercial segments in the New York market in the quarter and throughout the year. So I think both the combination of our efforts, the segments that we’re in and the overall health of the markets that we’re in were very important parts of the growth story in the quarter and throughout the year. Last quarter, we had a bit of a growth in CRE. We told you we have more, and we did. That’s also, I think, a good, solid commitment to the fundamental parts of the business we want to grow. We had solid growth in the industrial and warehouse segment, again, which is really strong, particularly in the Southeast. We have committed a bit more resources to our construction lending efforts and saw the construction loan portfolio pick up a bit.

And we’re particularly active in the multifamily construction area, which is a strong growth area and virtually every market that we’re in, multifamily units continue to trail the need for multifamily housing in most of the areas that we’re in. So those things really led to what we feel really good about in terms of our growth story for the quarter and for the year. There’s some other €“ other areas, mortgage warehouse, that environment remains pretty challenged right now. We’re committed to that business. We think we’ll see some growth in it. But right now, the overall housing market, as you know, is not robust. So, we’re seeing utilization rates fairly low in that business right now. Pinnacle and Bridge continued to decline during the year.

I think if the tax rates improve and pricing improves in Pinnacle that may be an area for growth. We continue to deemphasize the franchise lending and the equipment finance area, both from an overall quality and just return on asset perspective is not very attractive to us right now. Resi grew modestly in Q4. So looking forward into this year, we continue to see growth in the core C&I and CRE books. We see it across all of our geographies. As I said, we’re committed to mortgage warehouse for the long term and expect to see some growth in that portfolio. Also, if the environment for Ginnie Mae and EBO business improves, there could be some growth opportunities there as well. We also continue to build sales teams, and bring on new producers in the market, and we’re looking at some key hires even in this quarter as we start off the year, even beyond the Dallas expansion that we’ve talked about.

On the deposit side, total deposits grew by $160 million for the quarter. That growth was in interest-bearing deposits. As Raj said, NIDDA declined for the quarter, which was not unexpected in the environment given the rising rates and tightening liquidity. We had finished the loan-to-deposit ratio at 90%, which essentially was flat from the previous quarter. So with that, Leslie will get into more details on the quarter.

Leslie Lunak: Thanks, Tom. As we guided last quarter and as Raj said, we saw the NIM increased this quarter to 2.81% from 2.76%. The yield on investment securities increased to 4.33% from 3.12%. The duration of this portfolio stands at 1.94% at December 31. The yield on loans grew to 4.72% from 4.11% this quarter. That’s all mainly attributable to the resetting of coupon rates on variable rate instruments and new production and securities purchases at higher rates. Total cost of deposits was 142 basis points for the quarter, up from 78 basis points last quarter. I’d refer you to slide 6 of the deck. While this is a story that is obviously still playing out, you can see on that slide illustration that the spread between the Fed funds target and the cost of deposits have grown quite a bit, compared to back in 2019, which is a testament, in my mind to the improvement that we’ve made in the quality of the deposit base.

Total deposit beta to date this cycle is about 43%. At the peak of the last cycle, our total deposit beta was about 61%. We think it’s going to go up from 43%, but we still don’t think it’s going to get to that 61%. With respect to the reserve and the provision, slides 9 and 10 give some details about the reserve. The provision this quarter was $39.6 million. The ACL increased to 59 basis points from 54 basis points. As Raj mentioned, in spite of the decline in our NPLs and favorable credit quality signs, we built reserves primarily due to an increasing level of uncertainty about the economy. And qualitatively, we weighted a downside scenario more heavily in establishing our reserve this quarter. We did a — majority increase in specific reserves that you saw this quarter, which was another contributor to the reserve build related to one single loan that was charged off before the end of the quarter.

And substantially all the charge-offs taken this quarter were related to that particular loan. There’s not really much to comment on with respect to non-interest income and expense. I’ll just reiterate that for the year, non-interest expense, if you factor out the hedge loss that we took in the fourth quarter of 2021, it was up 7.5%, which is really exactly what we’ve been guiding to since the first of the year. So we came in right where we’ve been telling you we would with respect to that. I don’t think there’s anything there particularly to comment on for this quarter. So, with that, I’ll turn it over to Raj for closing comments, and then we’ll take your questions.

Raj Singh: I will open it up for questions. I know there are 19 other banks that have released. So we will — let’s take questions. Operator, you can open up the line.

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Q&A Session

Operator: Our first question comes from Ben Gerlinger with Hovde Group. Your line is now open.

Ben Gerlinger: Good morning, everyone. Appreciate you taking the time.

Raj Singh: Good morning.

Ben Gerlinger: I was curious, I just want to follow up on the guidance that was given. You said kind of the mid-single-digit loan growth and deposit growth. Was that correct?

Raj Singh: Yes.

Ben Gerlinger: And then, kind of, thinking just the deposit perspective, with quantitative tightening and kind of fighting against the treasury curve, really, in terms of what else is available to depositors. I mean, when you look at year-over-year, your deposits are down. I was curious, is there any new action, or are you willing to go to price the market in order to garner some overall growth relative to peers? I mean, you guys aren’t the only ones. I don’t mean to pick on you, but deposits are down. I was just curious on what actions or strategy might be taking to get them up.

Raj Singh: Yes, yes. I think the big difference — and we could be wrong on this, but the big difference from last year to this year is that we’re not expecting that slamming of the brakes that we saw with the Fed, but a more gentle sort of slowdown, tightening of monetary policy and eventually ending that tightening. If the Fed continues to surprise us with very aggressive actions, then achieving the single digits will be hard. Of all the guidance I’ve given you, whether its loans, margin or deposits or what have you, the deposit guidance is the hardest one to really give. And some of this is also our desire not to let our loan-to-deposit ratio get to out of whack and get past 100 to 105. So you can’t get the deposits. It comes down to price.

So we’re not — loans, you can look at the pipeline and kind of guess, okay, here’s where loan demand is, and this is what I know. Typically we’re able to close up the pipeline and so on. The deposits, it’s much harder. But based on another 325 basis point increase and eventually slowing on rate hikes, I think if that’s what happens, there is a good chance that we will end up at mid-single digits, if it’s worse, if the tightening is harder and stronger and longer, then there will be it will be tough to get to mid single-digits.

Tom Cornish: Ben, I would also add that one of the things that we look at is when you look at the creation of new relationships across the franchise, and you look at virtually all of the business segments that we’re in, the overlying economic activity obviously impacts the balances that might be in any individual account. But we have very, very good trend line information in performance history this year as it relates to the number of new relationships being created by all of the sales teams. And that gives us some confidence that, that will continue as we look into the year.

Ben Gerlinger: Got you. Yes. No, I’m probably thinking that you guys could get the deposits just really at what cost. And then kind of conversely to that, are you guys are expecting some margin expansion from here? So that’s from just kind of squaring triple to some degree?

Tom Cornish: Yes.

Ben Gerlinger: But the latter question I had is more kind of the nuance probably for level. But when you think about the expenses, BKU has historically had some pretty clear seasonality, I guess, you could say from quarter-to-quarter, but that kind of has fallen off as of late. I was just kind of curious, should we still expect 1Q to be a little bit higher relative to Q3 and then fourth quarter is the highest in the year, or is that kind of gone to the waste side? I was just trying to look for some overall quarter-over-quarter expectations. I guess the whole year is around seven ballpark, but just quarter-to-quarter?