BankUnited, Inc. Q3 FY2024 earnings call

Key Points

• Margin growth: NIM increased to 2.78%, up 6 basis points from the prior quarter, driven by proactive management of interest rates and deposit costs.
• Balance sheet transformation: Focus on improving profitability through balance sheet changes, with efforts to reduce high-priced deposits and reposition the loan portfolio.
• Credit quality: Low charge-offs, with ACL increasing, and non-performing assets (NPAs) ticking up slightly but remaining manageable.
• Hiring: Significant hires, including Beth Hosen, to strengthen small business, commercial, and retail franchises.
• Hurricane updates: Hurricanes in September and October caused no major damage to physical premises or loan portfolio, with ongoing assessment of Hurricane Milton's impact.
• Long-term strategy: Emphasis on sustained improvement in EPS, margin, ROA, and ROE through balance sheet adjustments and disciplined credit management.

Net income for the quarter was $61.5 million or $0.81 per share. Net interest income increased by $8.1 million or 4%, with the net interest margin (NIM) rising 6 basis points to 2.78% from 2.72% in the previous quarter. Loans decreased by $230 million, primarily in residential and franchise/leasing. Credit charge-offs were very low at $6.5 million. The allowance for credit losses (ACL) to loans ratio increased to 94 basis points. The CRE portfolio continued to perform well with modest exposure compared to peers, and the office segment showed some improvements but remained a monitored area.

Forward-Looking Statements

• NIM: Expected to be flat to slightly down in the fourth quarter, with catch-up needed due to lower starting points and faster-than-expected rate cuts.
• NIDDA: Anticipated to be flat in the fourth quarter but expected to grow again in the first half of 2025.
• Non-brokered deposits: Expected to continue growing, with current growth in the high single digits.
• Margin: Trajectory dependent on balance sheet transformation, aiming for continued growth beyond current levels.
• Loans: Expected mid-single digit growth in the fourth quarter, with focus on core commercial and CRE portfolios.

Risks

• External market factors: Impact of adverse events in the financial services industry, including Fed actions and geopolitical uncertainties.
• Hurricane impact: Ongoing assessment of potential loan portfolio impact from hurricanes, with possible provisioning needed.
• Regulatory environment: Uncertainties from regulatory inquiries and compliance requirements.
• Economic outlook: Potential for seasonal headwinds and uncertainties in economic conditions affecting deposit and loan performance.

Q: Good morning everyone. I just want to make sure I had it all. You said margin roughly flat next quarter, noninterest-bearing probably a little bit softer due to some seasonality trends. And then you also said there was an expense for railcars, I'm assuming expense is onetime in nature?

A: It is sporadic or periodic in nature is what I would call it.

Q: Hi, good morning guys. I had a quick follow-up on the noninterest-bearing deposit guidance. Is that referring to the end-of-period deposits? Or is it referring to the average basis?

A: Really probably both, I would say flat to slightly down in both counts.

Q: Hi, good morning. Just looking at the deposit cost trends or actually maybe just the broader funding cost trends, how should we be thinking about the duration of the FHLB borrowings that you added and the duration of the broker deposits for one part of that. And then the other is when you're looking at the ability to reprice deposits lower from this first rate move, is that move in-line with your expectations? Or has pricing been a little stickier than maybe you initially thought?

A: The increase in FHLB advances, what we put on is all very short because we expect that to be temporary. The duration of the broker, it's mostly six-month money. In terms of deposit pricing, it actually has been for this first cut that happened. We came out exactly where we modeled, right? So Leslie mentioned the beta was 78% or so. I think we are modeling 75%. So it was pretty close to what our expectation was.

Q: Hi, good morning. Again, just circling back to the margin commentary. I'm just wondering how that translates over to NII. Should we extrapolate that flattish margin means flattish NII? Or do we get maybe some uptick on the volume side given some of the strength in the lending pipelines?

A: I mean, I think we should probably see for the full year, mid-single-digit growth in NII as well. So I think there'll be some benefit in the fourth quarter from the loan growth that we're anticipating. But I still think for the full year, probably in a mid-single digit growth NII.

Q: Hi, good morning guys. On the title business, how much do those deposits declined this quarter? And where do those sit at quarter end or for the average balance? Whatever you guys have would be great.

A: I think 1/3 of that $430 million decline was from the title business roughly.

Q: Hi, good morning. Question, Raj or Tom. You note in the slide deck, plenty of capacity to grow on the commercial real estate side, I think you're at [164%] (ph) or so. Saw a little bit of uptick in multifamily lending this quarter. Just curious, do you have any sort of guidelines? Are you targeting specific ratio there? Just maybe curious what the comfort level is to grow that ratio.

A: I don't think – there is plenty of room to grow. It's not about kind of the [165%] (ph) number go up to [185% or 200%] (ph), whatever. We're not solving for that. There is plenty of room to grow. Where there is restriction is there are asset classes that we are not touching.

Q: Hi, thanks. Good morning. Thanks for all the information this morning. I was just curious, either from Raj or Tom, about the potential for upgrades on credits and whether it's from lower interest rates or new tax information you have from borrowers? What's the potential to see upgrades in some of the commercial lines that you disclosed?

A: I think I'd split it into 2. I mean, one, the CRE portfolio, we can kind of clearly get line of sight on upgrade potential, which we think is good because a good portion of it is tied to this rent abatement issue that we have in new leases that have been signed in office buildings. So I think Leslie or Raj mentioned earlier, we do not count -- sign leases when there's physical occupancy until the 90 days after the rent is being paid. So we can kind of chart out property by property and look at it of those properties that have been downgraded. And we can almost say that this particular date, this is when we will start to count that rent being paid. So we have a pretty good sight line and feel good about upgrades within the overall CRE portfolio because it's more systemic kind of the nature of what we're looking at. In the C&I portfolio, that's a little harder to say because every individual loan is in kind of a different industry segment, a different issue. It's a little harder to look at it at a very generalized manner. I would say we see some where we think there's good upgrade potential. Somewhere -- management changes and business model changes are ongoing. That may take a longer period of time, and some of them may be more stuck where they are. I would say, in general, lower rates will help everything. It will help the C&I portfolio as well. It's harder to pick that. I would be optimistic about that. But in the CRE portfolio, it's much easier to have very direct line of sight, and I would be more optimistic about that.

Q: Raj, on vacation before earnings. He's clearly comfortable. Obviously, most of the questions have been asked and answered, but I did have a question on if you have any preferences for what the Fed does? It feels like the margin, March is higher just based on what you're doing from a business point of view. And I understand the pause in the margin this quarter, I get that. But what -- is there anything that you would prefer the Fed does from a rate perspective?

A: Not really. We've built our balance sheet in a way that it doesn't really impact us that much. Of course, if they move 100 basis points, 200 basis points and surprise everyone, that's not going to be good. But a gradual reduction in rates is what we are expecting, and we'll be fine. I have a very long laundry list of what I'd like the fiscal side of the house to do. But on the monetary side, I really -- I think they've done a good job. I think they have a very difficult task ahead of them. I still remain afraid of that inflation might spark again next year based on all the spending and all the deficits we're talking about and all the giveaways that come about during election time. Hopefully, cooler heads will prevail next year, and we will have more sort of responsible fiscal policy. But on the monetary side, I think they've done a good job and I think if they just continue on a steady pace and not surprise the markets, I think we'll be fine.