BankUnited, Inc. (NYSE:BKU) Q1 2023 Earnings Call Transcript
BankUnited, Inc. (NYSE:BKU) Q1 2023 Earnings Call Transcript April 25, 2023
BankUnited, Inc. misses on earnings expectations. Reported EPS is $0.7 EPS, expectations were $0.89.
Operator: Good day and welcome to the BankUnited First Quarter 2023 Earnings Conference 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, Corporate Secretary, Ms. Susan Greenfield. Please, go ahead.
Susan Greenfield: 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.
Rajinder P. Singh: 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 saying, 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. March 13th, you know the week of March 13th was certainly disruptive. It cost us about a 1.8 billion in deposit balances. The deposit flows basically the week after that returned to normal.
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. And currently we have 12.3 billion in same day availability, which equates to 128% ratio of the uninsured deposits to collateral -- and uncollateralized -- uninsured and uncollateralized deposits. Our capital position as you already know is strong. Our CET1 is 10.8%, at the bank level it's 12.5%. We have suspended our buyback given all the volatility that we're seeing in the markets. We will revisit it again later in the year, the decision later in the year.
And also just the CET1 ratio of 10.8%, if we were to actually 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 you know on just those things I'll reiterate again, business is stable and growing. Our liquidity position is strong and capital base is robust. Let's talk a little bit about the quarter and let me make some remarks about loans and then really most of my comments will be about deposits as you can imagine. From a loan perspective this was -- first quarter is our slow quarter as you can go back and see many years, I think last year, last couple of years it was a negative growth quarter. This quarter it was basically flat.
So there was nothing really interesting and exciting. It is our slowest quarter of the year and it came in just as we had expected with basically flat numbers. There's some growth in C&I, some reduction in resi, but that was all pretty much predictable. On the deposit side, I would say that the quarter you could split it into two halves. You can talk about from January 1st all the way to the events of the March 10th, March 11th, that weekend and then what happened in the three weeks after that. So just before these events happened, so by March 10th, we were down about $277 million in deposits and like I said a little bit earlier intra month, intra quarter we are usually down and then month end and quarter end we usually see a build. So when I am standing on March 10th and looking at a negative 277 million that generally means we will end the quarter at least flat and most likely up.
So that's what we were expecting. We did see of course a shift from interest -- non-interest bearing to interest bearing. So that that trend was happening in January, February into March as well. But, before all of this chaos happened, it was looking like a fairly normal quarter both on the lending side and on the deposit side. And then March 10th, 11th, 12th that weekend happened, we saw outflows of about $1.8 billion in the very first few days most of it was on Monday. Some of it actually was on Tuesday and Wednesday, but by the end of that week things have basically gone back to normal. Our nervousness was still high, but what we were seeing in the deposit flows, it went back to normal by the following Monday. And then from there on while we were in heightened alert, we really did not see any unusual activity just except for that one week, for the week of March 13th.
And like I said, as we always expect, deposits start to grow towards the end of the quarter and we ended up where we did. 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 I would say surprised us. The eight did not because the eight would, I would say we're in the category of institutional customers often with fiduciary responsibilities, who decided that regional bank sector not banking on it, but regional bank sector was risky and they wanted to pull money out from all regional banks. Two were very core businesses where they didn't take money out completely but they derisked from us and one client took out about half the money, the other one took out a little more.
And that is core money which was very profitable from a margin perspective and we're working hard to bring that money back or at least some of that money back. We also took a look at -- I asked Leslie who said, okay, we get this 10. How about we look at the top 100 customers. Is there anything else happening in the sort of the other 100 customers. And Leslie went back and said, you know what, nothing happened in the first 100 customers. We looked at customer by customer, we didn't see any flows, nobody closed, nobody pulled money out. I would say, you know what, let's do over 200 customers. Let's go another 100. And again, there was nothing that we found. So it was really limited to 10 clients. It was limited to -- it actually all was Monday and Wednesday for some reason.
Most of it was Monday and Wednesday. And after that, it's been pretty normal. Now I would like to make it clear that this money has not come back and we are not engaging very strongly to bring that money back because this money kind of showed us exactly how nonstrategic it was, and we probably shouldn't have had that much of this money here anyway. So we have not engaged in any meaningful way to try and bring back this money. And the comments I'll make about the pipeline and stuff we're doing there on will be separate, will be removed from this 1.8 billion, which I don't talk about in a different place. Let's see here. So in terms of our reaction, what we did that weekend and in that week, this shouldn't surprise anyone, I'm pretty sure every bank was doing this.
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We were hearing things about how the FHLB system is getting taxed and posting collateral is an issue and so on. So we did not see that actually on our end. We drew down $2 billion in cash on that Monday morning without any issue. We posted collateral with the Fed at the FHLB and stayed in constant communication with our regulators, with of course, Fed and the FHLB. We equipped our RMs and branch personnel with all the information that they needed, we offered ICS reciprocal program, which you've always done in the past. It has never really been much of a product of interest, but we did offer that more widely. We held obviously lots of employee calls. And so it was basically communications one-on-one is what we were doing most of that week. It did for a period of time, slow down the sales process if everyone was distracted in sort of the middle of March towards -- all the way into end of March.
But I'm happy to say, and I'll get into this in a little more detail that it has not derailed in any way, the pipeline that we were working on. That was my biggest fear, like when this was happening, on one hand, it was what's happening with deposits that we have currently. And the second question was what will this mean for going forward in terms of the pipeline that we have when we are going to protect it or not. And I'm happy to actually say that not only have we been able to protect it, but grow that pipeline. And a few more comments in a couple of more minutes. So let me say, deposit growth is hard. It's challenging, but it's also the number one strategic priority for the company. And when I say deposit growth, I mean core deposit growth.
The pipeline that I just talked about in a little bit, we do pipeline reviews all the time, both on the lending side and the deposit side. We did one actually just before this crisis happened in mid-March, we did one in early March. And I spent a good part of yesterday going through our pipeline in preparation for this meeting. The numbers today are significantly better and higher than the numbers a month ago, which is why I was feeling very good yesterday. There's a couple of reasons for it. One is just some delayed activity which didn't fall off completely, but just got delayed. But one large part for that healthy pipeline is that out of this chaos comes also an opportunity. We've had a couple of really large bank sales and others were struggling and they're throwing off a lot of business.
And while we don't completely fall -- don't have a perfect overlap, let's say, with Silicon Valley Bank, and I'm not sure we're going to benefit from that, there was some overlap, between the kinds of business we have and Signature had. That actually, I think, was also part of the reason why we saw the pain, but also that is what is creating an opportunity. There's a lot of talent and a lot of business that has been thrown off. And I have actually interviewed more producers in the last month than I did all of last year. And so while there is a moment of caution, it is also a moment of opportunity, which -- and we have to capitalize on that. So the pipeline for deposits look healthier than they did a week before this happened, and we are doing everything to capitalize on them.
And this was done based on a very detailed review, account by account relationship by relationship. By the way, I did tell my team members or my entire producing staff that we're no longer in the business of home runs, we're only in the business of singles and doubles. What this means is we have to build more granular but we've been saying this actually for the last couple of years, but now it is even more important, that this business that is being thrown off is a lot of big ticket business being thrown off, that's not what we're interested in, its core middle market, small business, which we want to build the pipelines on and the business over the long term. So let me talk a little bit about guidance. So in terms of deposits, like I said, we feel pretty good about the pipeline that we have of core business, put aside the $1.8 billion that is left aside.
I mean, there is probably some part, like I said, on the $1.8 billion, which would be good and strategic and we would like to bring back. But I'm not very excited about bringing a lot of or any of this very lumpy price sensitive. We always knew this was price sensitive, but in this Black Swan event, it also showed us that it's very nervous money also. So I'm not sure there's much we can do with that kind of nervous money. So I'm not looking to bring this back, at least not in the way that it was here before. On the lending side, the economy is doing just fine. I mean my comments generally, I always talk about credit, but I don't really have much to talk about credit. So I'll just leave it at saying that credit is fine, and that's not what we're losing sleep on, especially Florida is doing phenomenally well.
Loan pipelines are healthy. But we are going to be careful in what kind of loans we do. We're going to do loans where we have the full relationship. And just credit-only transactional business, we are not going to do or we're going to deemphasize. The resi portfolio is strong this quarter that you should expect it to keep shrinking over the course of the rest of the year. The last -- through the pandemic, when we were nervous about doing a lot of commercial business, but we had deposit inflows, the place where we put that money was the bond portfolio and resi, and we have gotten heavy in those classes. And I think you should expect both, just like we did saw this quarter, securities run down and the resi portfolio will run down over the course of the rest of the year.
C&I will grow given the pipeline that we're seeing and fairly healthy. I think at some point, if the economy really slows down and we do enter a recession, then maybe not. But right now, I don't see that, so I am predicting good C&I growth. CRE, I would say, is somewhere in the middle, probably stay flattish. And overall, last Leslie will talk about margin and she will walk you through the back-end, left the more fun stuff for Leslie, and I took some notes before this call to make sure I cover everything. We did increase the dividend by $0.02 this quarter as we did this time last year as well in February of last year. We did buy back stock $55 million of stock until we stocked it. There's a little bit of room left in the authorization. But like I said, our buyback remains -- will remain suspended until we see most stability in the economy and in the liquidity situation that the banking industry finds itself in.
Let me see, that's it, 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.
Thomas M. Cornish: 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. So market share will be the name of the game, I think, 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 the small business teams. That consistency has carried us through over a long number of quarters now. We feel really, really good about what the deposit pipeline looks like over the near term, this quarter, next quarter, the rest of the year. And I'd say it's a couple of different areas. We've got a number of specialized teams.
We continue to invest in TM products, payment capabilities, specialized products within verticals areas like HOA and our title service business are two examples of that. We've invested, as you know, a good deal on our digital capability for the small business side, small business relationships are coming in over -- in the 400 range every quarter. We think that's a good place for us to invest in future deposit growth. We've recently rolled out a new consumer checking product that we believe will be attractive. As Raj mentioned, 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 the various challenges that they've had, and it's presented us a strong number of new account client opportunities in the New York market from those banks.
We've continued to onboard new relationship managers in all geographies and verticals. You probably saw a press release that we on-boarded an entire team from HSBC in Florida that specialize in multinational business across the state. We're very interested in that. We saw continued good growth in the Atlanta team and business in the Atlanta market has been very strong. Last week, we opened up our office in Dallas. We hired CRE Dallas head. That's our first hire in the market. Pipeline is starting to build in Dallas already. And I think over the course of the next week or so, you should expect to see us make a significant team acquisition in the New York market that we'll be able to finalize in the next couple of days. So we continue to invest in people, we continue to invest in teams, both in the geographies and the verticals that we're in.
If you take a look at Slide 8 of the deck, it's got some breakouts of deposit verticals. Our largest is in the title solutions business with total deposits of around $2 billion. Over 85% of these are in operating accounts, there are over 8,000 accounts in this space with 950 relationships. And this segment has actually been very stable and grew by $100 million as of the end of March. There are really no other industry segments where we have deposits of over $1 billion. The loan-to-deposit ratio ended the quarter at 97%. While we're so comfortable with that, we would like to see that come down into the low 90s as the deposit base develops and we do some of these shifts, as Raj mentioned, from residential to commercial and other areas. So I'll talk a little bit about loans for a moment.
Consistent with the strategy that Raj laid out, residential declined by $111 million in the quarter. The commercial segments in the aggregate grew by $118 million. As Raj said, we continue to see solid pipelines of opportunities across the commercial segments, all geographies, all segments. And it was a good growth quarter for a quarter that typically is a negative quarter. We have not grown typically in the first quarter and we did. And as you all know, generally, you don't see financial statements in the first quarter, so it tends to be a slower quarter. Overall, C&I grew by $173 million. CRE and BFG were down just a bit. Pinnacle was up modestly, and Mortgage Warehouse was stable for the quarter. Going forward, expect growth in middle market C&I, traditional new geographies, modest selective growth in the CRE segment.
But BFG will continue to decline, and Pinnacle will probably see some growth in relationships that tend to be deposit-oriented relationships within that line of business. Take a few minutes to speak about the CRE portfolio. Obviously, there's been a lot of press on this topic in the office segment in particular. I would point out that CRE is just slightly less than 23% of our total portfolio. So I think for banks in our size range, that's a pretty conservative level and is down significantly from where it would have been, now 24% over where would have been two years ago before the pandemic. So we have de-risked this portfolio substantially, a lot of that has been in the rent-regulated space in the New York market and given how events have played out in that segment we've been very happy with that decision.
If you take a look at Slides 20 through 22 in the supplemental deck, it will give you some detailed information about the portfolio. I would say, when you look at the office section of it, 60% is in Florida, where the demographics have been very favorable. I think everybody is very familiar with the job growth in Florida, new business starts, in state migration is very strong. Our portfolio is well diversified across all markets, no significant concentration in any one market. It's in Miami, Fort Lauderdale, Palm Beach, Tampa, Orlando, Jacksonville and all markets that are showing very, very strong growth overall. If you look at the weighted average loan-to-value in the portfolio was 57%. Weighted average debt service coverage ratio was about 1.9%.
And if we look at maturities in the next 12 months, 8% would fall into the category of where they are either fixed rates either by our own balance sheet rates or swaps. So our upcoming maturity over the next 12 months for resets is relatively modest within the portfolio. Specifically in respect to office, which we continue to closely monitor, that portfolio is about $1.8 billion. Again, 58% of the portfolio is in Florida, where demand and absorption continues to exceed supply. Only 9% is in the Manhattan market. And in the Manhattan market only 5% actually has lease rollover within the next 12 months. It's one of the smallest markets where we have lease rollover, 14% is on Long Island in the boroughs, and neighboring states and 19% is in other areas with no particular concentration.
Weighted average LTV of the office portfolio is 64% and the weighted average debt service coverage ratio was 1.7%. And the overall portfolio in office rent rollover over the next 12 months, it's just a little over 10%. So again, very modest. If we look at the office book in the last five years, our cumulative charge-offs have totaled only $2 million in the entire portfolio. So we're very confident that the overall fee portfolio is a quality portfolio, and we look at the diversification and metrics of the office portfolio. We feel very good about where we're positioned in office. So with that, we'll turn it over to Leslie for more details on the quarter.
Leslie N. Lunak: Thanks, Tom. So in summary, net income for the quarter was $52.9 million or $0.70 per share. Speak a little bit to the NIM. The NIM declined to 2.62 for the quarter compared to 2.81 last quarter, up from 2.50 for Q1 of 2022. We obviously missed guidance, our NIM guidance that we gave you in January. While earning asset yields did continue 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 NIDDA and interest-bearing deposits. And certainly, we didn't anticipate the events of March. Overall, non-interest bearing DDA was down about $780 million and average cash balances for the quarter were up almost $300 million, all of that happening, obviously, at the end of March, and offsetting all of that with a $1.1 billion increase in wholesale and other high-cost funding at current market rates.
And we estimate the impact of that overall mix shift on NIM this quarter to be about 14 basis points. The average cost of deposits went up from 1.42% to 2.05% and the cost of FHLB advances went up from 3.44% to 4.27%. That advanced portfolio is by no means optimized in order to retain the maximum flexibility. We kept that short, which is right now the most expensive part of the curve. And we're working right now on optimizing the composition of that portfolio. Looking forward, I will just say that any guidance we give you about the NIM is, I would say, fraught with peril but it's a very difficult thing to predict right now. But I will give you at least I'll lay out one scenario for you. Given the starting point and the fact that we're still holding a higher than normal level of cash on the balance sheet, the NIM will be under pressure again next quarter.
I'll give you one scenario, if we're able to -- if we keep deposits and the funding mix flat over the remainder of the year, see the strategic shift in loans that Raj described, I'd expect the NIM for the year in the 250s. We think we can do better than that. We do think we can grow deposits and improve the funding mix, in which case, it will be a little bit better than that. A few more details on liquidity. You can see in Slides 8 through 10 of our deck, I'll reemphasize what Raj said, 62% of our deposits are insured or collateralized at March 31st. Currently, same-day available liquidity is $12.3 billion, which provides us with 128% coverage of uninsured and collateralized deposits. Deposits in the ICS recyclical program grew from about $94 million at March 13th to about $574 million currently.
So we have seen some interest in that program. With respect to the securities portfolio, I'll just emphasize, as you're aware, with the exception of one tiny little $10 million bond, all of our securities are available for sale. The pretax mark on the available for sale portfolio improved by $100 million this quarter. And again, I'll point out that if AOCI will run through our regulatory capital ratios, CET1 would still be a healthy 9.4%, significantly in excess of the 7% well-capitalized requirements, including the conservation buffer. The duration of the portfolio was 1.95 and 68% of it is floating rate. Moving to a little bit of discussion of the provision and the reserve. The provision this quarter was $19.8 million, that was down from the prior quarter.
I'll remind you, we kind of took our pain in the fourth quarter. We added $16 million of qualitative overlay in the fourth quarter related to economic uncertainty specifically. And most of that is still there. This quarter's provision does reflect further deterioration in the baseline forecast and an increase in some specific reserves. The ACL coverage ratio increased from 59 basis points to 64. Our Economic Forecast Committee selected the Moody's baseline as it's reasonable and supportable forecast for this quarter. However, a significant qualitative overlay that we established in the prior quarter still remains with respect to uncertainty about the economy. We believe our current reserve level is sufficient for a mild recessionary scenario.
The ACL coverage ratio would be expected to move up with a mixed shift from resi to commercial that we are expecting to happen over the rest of the year and will obviously increase further if the economic outlook deteriorates materially from here, which we don't currently expect. We provided you with some stress testing results for the CRE portfolio in the deck. This was run with the Moody's S4, which is a pretty severe recessionary scenario and lifetime losses on the free portfolio totaled about $97 million in that scenario. Now, while we don't want that scenario to materialize, if it does, I think that's a very manageable level of credit losses. I know we're going to get a question about this, so I'll head it off. We believe that the level of our CRE reserves currently as well as those stress testing results, and remember, we're in the same model as everybody else is using here.
We believe those numbers are reflective of the high quality of that commercial real estate portfolio. Decline in non -- one more thing I'll say, there was a modest increase in criticized and classified loans this quarter. Almost all of that was attributable to one loan that paid off yesterday. So that's back down to where it was before. The decline in non-interest income this quarter resulted primarily from $13.3 million in losses on preferred equity investments that impacted EPS by 13% and the issue that has been leading to most of those losses has now been liquidated. $0.13, what did I say. . Non-interest expense quarter-over-quarter, probably the only thing worth mentioning there is $4.2 million in operational losses that we took this quarter.
There were two incidents there, one was a check kiting scheme and another was a customer that we had who was hacked or defrauded, not us, the customer during the quarter, and we made the decision to -- I think we ended up reimbursing that loss. With that, I will turn it back over to Raj for any closing comments.
Rajinder P. Singh: No, let's open it up for questions. I'm sure there are plenty, and then I can maybe make closing comments at the very end.
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